Q&A Discussion Forum For CompensationStandards.com

Client is considering amending its equity incentive plan to eliminate the default provision for Section 16 insiders that tax withholding obligations arising from an income recognition event with respect to an award under the plan must be satisfied by having shares withheld unless the Comp Comm approves payment in cash or making other arrangements in advance of the event. As amended, insiders would have the same option to choose to have shares withheld or pay in cash. Apart from the potential impact on Section 16 exemptions, do you believe such an amendment would be considered a material revision under the NYSE rules that would require shareholder approval? Does not add to dilution and does not seem to be analogous to any of the other specified amendments the NYSE has identified as material.

RE: While I'd suggest you run the issue past the NYSE, that kind of change doesn't seem to hit any of the non-exclusive list of material revisions set forth in Section 303.08, and as you suggest, it also doesn't appear to be similar to the kind of changes identified in Question B-2 of the NYSE's Executive Comp FAQs that would be deemed to be material. I'd also point out that in another situation, the NYSE determined that a change in tax withholding was not a material change. See the discussion in Question C-1 of the FAQs.
-John Jenkins, Senior Editor, CCRcorp 11/5/2021

If senior executives (including NEOs) and certain other groups of officers and senior officers enter into a form of non-solicitation agreement with company (for which consideration is adequate under state law but insignificant (only a few hundred dollars)), would the fact that the NEOs are signatories to this make it a "management contract" deemed material and required to be filed under S-K 601(b)(10)(iii)(A)? It's hard to envision such an agreement as a "management contract" but thanks for any thoughts or usual practice on this point/similar points.

RE: I don't know if this is what the SEC is getting at when it uses the term "management contract," but I think it's exactly what they're getting at in Item 601(b)(10)(ii)(A), which requires the filing of "Any contract to which directors, officers, promoters, voting trustees, security holders named in the registration statement or report, or underwriters are parties other than contracts involving only the purchase or sale of current assets having a determinable market price, at such market price" unless it is "immaterial in amount or significance."

So, I think you'd need to file the non-solicitation agreement as an exhibit unless you conclude that they're immaterial.
-John Jenkins, Editor, CompensationStandards.com, CCRCorp 10/19/2021

Is anyone aware of guidance out there on whether Director fees can be sent to an LLC instead of directly to the Director?

RE: To clarify, one of our Directors inquired if we can pay his director fees to his LLC instead of directly to him. Any guidance would be greatly appreciated.
-10/17/2021

RE: I'm not aware of any securities law prohibition on paying a director's fees to an entity with which the director is affiliated, although that might raise additional disclosure issues if other persons aside from the director were members of the LLC and had an interest in the fees. But there may also be tax issues involved, such as the general prohibition on assignment of income. I'm not sure how that would work with a pass-through entity such as an LLC.
-John Jenkins, Editor, CompensationStandards.com, CCRCorp 10/18/2021

RE: Here's a reply I received from a member shortly after I posted this response that provides some more information on the tax issue I raised:

Our view has been that in most cases this is problematic. The main issue is that under most corporate laws (certainly under Delaware law), a director has to be an individual (Cayman Island law allows a director to be a corporation, but for example Section 141(b) of the DGCL explicitly says, “(b) The board of directors of a corporation shall consist of 1 or more members, each of whom shall be a natural person.”). Even if allowed under local law, the question is who did the shareholders elect to the board: the individual or the entity. Therefore, it is the individual, not the LLC, who is performing the services, so it is exactly the tax law issue which you raise, that the individual cannot assign the income to the LLC.

There may be limited circumstances where, for example, an entity that is a large stockholder has a right to name a person to serve as its representative on the board and requires that representative to pay over any income it receives for such service to the entity, but even in that context it’s not well-settled under the tax laws. As to the company, it is responsible for issuing the appropriate tax forms so could be liable if it is viewed as assisting the director avoid individual income taxes.
-John Jenkins, Editor, CompensationStandards.com, CCRCorp 10/18/2021

If a company determines its median employee in Year 1, then in Year 2 completes an acquisition that materially changes its employee population or its employee compensation agreements. Can the same median employee be used in Year 2 relying on the acquisition exemption? Outside of the acquisition, there would not be a material change to either employee population or compensation. The instructions seem a little unclear on this point. Clearly you can exclude employees from an acquired business if you are doing a median employee determination in Year 2 per Instruction 7, but can you also exclude the acquired employees when you are thinking about whether there has been a material change per Instruction 2? Seems like maybe that's what this language in Instruction 7 is getting at: "Those employees shall be included in the total employee count for the triennial calculations of the median employee in the year following the transaction for purposes of evaluating whether a significant change had occurred." Seems to suggest you can exclude from your consideration with respect to a material change. Also seems somewhat incongruent to be required to consider them for purposes of a material change in employee population / compensation agreements, but then exclude them from any subsequently required re-determination of a new median employee. Hope this is clear. Thoughts?

RE: Mark Borges has these thoughts: I read Instruction 7(2) to say that you don't have to include any employees that become your employees as the result of a business combination for the fiscal year in which the transaction becomes effective. However, you do need to include them in your employee population for the year following the year of the transaction to determine whether you are still eligible to us the same median employee as permitted by Instruction 2 to Item 402(u).

So, the company would be able to use its median employee identified in year 1 as long as the acquisition becomes effective in year 2. Thereafter, the company would have to add the acquired employees to its employee population to see whether it could still use the year 1 median employee in year 3. I believe that, in addition, for purposes of interpreting whether there has been a material change in your population in year 2 for purposes of Instruction 2, you would also exclude those employees being excluded pursuant to Instruction 7.
-Liz Dunshee, Managing Editor, CompensationStandards.com 10/6/2021

Illinois recently passed amendments to the Freedom to Work Act. If you impose adverse financial consequences on post-employment, that is treated like an actual non-compete under the Act. One of the requirements of the Act is that you have to notify employees and advise them to consult an attorney if you have a non-compete, which is defined to include a forfeiture-for-competition provision. I think these forfeiture for competition provisions are pretty common. Since most award agreements are not subject to Illinois law, I was wondering if an award agreement should even reference the Illinois law? Should we just advise all employees to consult an attorney? If we add language to the award agreement saying employees based in Illinois are advised to consult an attorney, are we basically admitting that the other state law that we picked does not apply or that other laws apply as well? Will this weaken our ability to rebut claims that other jurisdictions (e.g. those in Europe) don't apply. Should we say nothing and take the position it does not apply? Curious what others are thinking about. Winston Strawn has a nice summary of the new law if you want to see more.

RE: I think some companies might conclude that the best approach would be to include language under a caption like "For Illinois Employees" that sets out the notices required under the law. It seems to me that this is a good way to help ensure compliance with it, which I think is the more fundamental concern.

I think the governing law provision of the contract is likely a red herring. Internal affairs issues are pretty complicated and you should consult with the appropriate internal or external counsel on this issue, but my gut reaction is that the award agreement won't be subject to the internal affairs doctrine, so if you're an Illinois employer, my guess is that the statutory obligations imposed on you as an employer would apply regardless of what law governs the contract itself.
-John Jenkins, Editor, CompensationStandards.com, CCRCorp 9/8/2021

Fact: a pubco reimburses $50 per attendee for employees who have business dinners with clients and team members. NEO has a business dinner with a direct report or, say, another NEO. It is integrally and directly related to the NEO's duties (team building, strategizing, talking shop, and so on). Dinner costs $1,000 (so $500 per employee). I can see how that would not *technically* be a perk (it is integrally and directly related to his position and thus we stop at Step 1 of the perk analysis). But it smells really bad. At this point, is it just a judgment call on whether reimbursement of the $1,000 is a perk?

RE: Yes, I think it is a judgment call. Ultimately, this is an area of principles-based disclosure requirements, and there's a range of reasonableness. For example, I don't think anybody would consider a deli tray at a lunch meeting of the management committee to involve a perk, and the proverbial "quiet business meal" doesn't seem to raise an issue either, but the optics of an opulent feast that goes well beyond the company's standard reimbursement policies aren't good and at least raise the issue of whether a perk is involved.

In principle, I think an event can be so over the top that it calls into question the premise that the event is "integrally and directly related" to the individual's duties. For example, if you had a meeting of c-suite executives that was held in a box on the 50 yard line during halftime of the Super Bowl and attempted to claim it didn't involve a perk, I don't think that would pass the smell test. In extreme cases like that, it seems to me that the business justification is being used solely as a makeweight for a claim that a perk isn't involved - and that doesn't seem consistent with principles-based disclosure.

Does your meal scenario fall into that category? Perhaps, but I think some companies might conclude otherwise. Sure, it's a fairly lavish dinner, but does it go so far as to make the "integrally and directly related" argument nothing more than a pretext to avoid perk disclosure? That's the judgment call that you have to make.
-John Jenkins, Editor, CompensationStandards.com, CCRCorp 8/24/2021

RE: John, as always, very useful. Thank you!!
-8/24/2021

Is there a consensus around how prompt an executive must reimburse a company for personal aircraft use (such that the personal aircraft use is not a disclosable perk) for the reimbursement not give rise to any issues under SOX 402?

RE: I think the 25 Firms Memo is still the guiding light for most things related to SOX 402. In general, when dealing with reimbursement to the company for particular transactions, the memo says that payment needs to take place pursuant to a policy requiring reimbursement within a "reasonable period," which in the first place the memo uses the term it accompanies it with the phrase, "e.g., monthly." I've not seen anything more definitive than that.
-John Jenkins, Editor, CompensationStandards.com, CCRCorp 6/3/2021

RE: Hey John, thanks as always for your input!
-6/3/2021

RE: You're welcome!
-John Jenkins, Editor, CompensationStandards.com, CCRCorp 6/3/2021

We have a client incorporated in Delaware with an incentive plan that gives the Company the discretion to determine how the exercise price may be paid upon the exercise of a stock option. which includes a net exercise method. The incentive plan also gives the Company the discretion to offer to the holder the option for the Company to withhold shares to pay for taxes due upon exercise. A question has come up regarding whether the withholding of shares upon either (i) a net exercise or (ii) to pay for taxes due would be considered a "redemption" under Section 161 of the Delaware General Corporation Law. The Company does not have a surplus (as determined under Section 161) so it would be prohibited under state law from taking any action that would be deemed a redemption. Has anyone looked into this before / have any thoughts? Thank you.

RE: I haven't seen this addressed as a matter of corporate law, but the Staff's approach to the issue in Reg S-K CDI 149.01 indicates that it does not view any withholding involving only enough shares to pay taxes or the exercise price as a repurchase that must be disclosed under Item 703 of S-K:

"Question: Item 703 requires tabular disclosure regarding any purchase made by or on behalf of the issuer or any affiliated purchaser of shares or other units of any class of the issuer's equity securities that are registered by the issuer under Exchange Act Section 12. In connection with an employee benefit plan, an employee exercises an option using a process known as "net" option exercise. Is this transaction a repurchase by the issuer that the issuer must disclose under Item 703?

Answer: No. If, however, any shares are withheld in addition to the shares necessary to pay taxes or satisfy the exercise price, the company must disclose the repurchase of the additional shares under Item 703. Similarly, if the option exercise price is paid with company stock that the option holder otherwise owns, the company must report the repurchase of the stock under Item 703. [July 3, 2008]"

Despite the Staff's position, in the absence of Delaware authority, it may be prudent to proceed under the assumption that these transactions involve a repurchase of shares and that the company must have sufficient surplus to engage in them. You mentioned that you don't think the company has surplus, but keep in mind that when you calculate a company’s “surplus,” its “total assets” and “total liabilities” are not calculated by reference to their book value. Instead, the Delaware courts say that what’s relevant is the present value of those assets and liabilities. See, e.g., Klang v. Smith’s Food & Drug Centers, 702 A.2d 150, 153-154 (Del. 1997).

As a practical matter, that means that companies can (and do) have valuations performed that will in many cases allow them to “write up” the value of assets to pay a significant cash dividend or repurchase a large number of shares. Refer to the discussion beginning on p. 14 of the July 2019 issue of The Corporate Counsel.
-John Jenkins, Editor, CompensationStandards.com, CCRCorp 6/2/2021

The issuer has purchased from an NEO shares of the issuer's common stock at a per share price equal to the volume weighted average price per share over a 10 day period prior to the purchase. Would the amount paid to the NEO for the shares be included in Other Compensation in the Summary Compensation Table? It would be an amount paid to the NEO during the year, so I believe it would need to be included. Any thoughts? Thanks.

RE: On its face, that transaction doesn't look like it involves compensation subject to disclosure under Item 402. Item 402(a) notes that it is intended to encompass all compensation paid "for all services rendered in all capacities to the registrant and its subsidiaries." It goes on to say that all such compensation is to be reported pursuant to this Item, "even if also called for by another requirement. . . where a purpose of the transaction is to furnish compensation to any such named executive officer or director."

The repurchase transaction that you describe doesn't sound like it is in the nature of compensation for services rendered by the NEO. Instead, it looks like a related party transaction subject to disclosure under Item 404 of S-K if the relevant thresholds are crossed. (Obviously, additional facts and circumstances might alter that conclusion.)
-John Jenkins, Editor, CompensationStandards.com, CCRCorp 5/27/2021

Facts: Company sponsors sports team (gets ads). In exchange, Company gets 60 free tickets per to sport team's games. 5 of those tickets are used by CEO, spouse and three kids to "wine and dine" Company customers. Is any of this a perk if the other clients bring kids and spouses? Is any of this a perk if the other clients do not bring kids and spouses?

RE: Edit:

Facts: Company sponsors sports team (gets ads). In exchange, Company gets 60 free tickets per year to sport team's games.

5 of those tickets are used by CEO, spouse and three kids to "wine and dine" Company customers.

Is any of this a perk if the "wined and dined" customers bring kids and spouses?

Is any of this a perk if the "wined and dined" customers do not bring kids and spouses?
-5/26/2021

RE: If an executive uses a company asset for a combined business and personal use, the element that is personal could be considered a perk. I think that there's an element of personal benefit that exists in the fact that these tickets are consistently made available to the CEO and the CEO's family members, regardless of the fact that there is also business entertainment going on. I don't think that whether the client's family members attend or not affects the perk analysis. See the discussion on p. 54 of Chapter 7 of the Executive Compensation Disclosure Treatise.
-John Jenkins, Editor, CompensationStandards.com, CCRCorp 5/27/2021

RE: John, thank you for your thoughtful reply, and I hope you and your family are well.

I am wondering about the relationship between "business entertainment" and whether it can be considered "integrally and directly" related to an exec's job.

For example, on the tax (not perk) side, tax practitioners often get comfortable that "business entertainment" with a few business meetings/presentations is sufficient to support no income imputation and no corporate deduction allowance.

On the disclosure (not tax) side of the house, I am having a very difficult time delineating the contours of "integrally and directly" to business entertainment. If "integrally and directly" = "necessary", how does one go about determining whether "business entertainment" (say, a sports event) is "necessary"? I can imagine many executives saying that those sorts of events are "necessary" to maintain client relationships. Then again I can imagine the SEC saying that going to the Super Bowl to entertain a client is not "necessary". Perhaps the answer is that if we have to ask the question, best to disclose the aggregate incremental cost.

Thanks again John.
-5/27/2021

Our client's equity incentive plan includes a “large non-recurring cash dividend” within the definition of “Capitalization Transaction.” The client is contemplating a large dividend recapitalization transaction and wants to ensure that the key employees who hold options under the plan are not adversely affected. The plan also provides that “[i]n the event of a Capitalization Transaction, the Board will appropriately and proportionately adjust…the classes and number of securities and the price per shares of Common Stock subject to outstanding Stock Awards” (which include the stock options in question). I suppose that the amount otherwise distributable with respect to each share of common stock subject to an option could be applied as a deduction in the exercise price so that, upon exercise, the option holder gets the economic benefit of the dividend recap. But what if (as is expected to be the case for at least some of the client's outstanding options) the amount distributable exceeds the current exercise price; is it possible to have a “negative” exercise price under which the client would be obligated to make a payment to the option holder (in addition to issuing the underlying shares) upon exercise of the option? If it makes a difference, all outstanding options are NQSOs. Thanks.

RE: Mike Melbinger says: I have never heard of a negative exercise price. Only time I encountered anything similar the company reduced the exercise price and added shares to the option. Double check accounting impact of any solution with auditors.
-Liz Dunshee, CompensationStandards.com 5/23/2021

RE: Thanks. Is there any reason you can think of why the company couldn't amend its plan to allow for the grant of dividend equivalent rights with respect to options, crediting the funds to an account payable when the options vest, perhaps contingent on exercising the option?
-5/24/2021

RE: Mike says that you should check 409A for potential problems with dividends on options. That is why he did not suggest it previously. However, you would need to look into whether 409A distinguishes between regular and recap dividends.
-Liz Dunshee, Managing Editor, CompensationStandards.com 5/25/2021

Q: A company has a class action lawsuit pending by certain employees related to compensation. If the company settles the lawsuit, its employees, including named executive officers, will receive payment that relates to compensation from a prior year. Any Item 402 disclosure?

RE: This isn't a situation that I've seen addressed anywhere, but for what it's worth, here's my two cents. Given the breadth of Item 402, I think that if the settlement involves compensation payable to an NEO during any of the years covered by the comp tables, appropriate disclosure should be included there. Any payment received in the current period by NEOs relating to years outside the table, as well as any payments to non-NEO executive officers, should also be disclosed as a related party transaction under Item 404, assuming the amount involved is above the disclosure threshold. (I don't think a transaction like this qualifies for exclusion under Instruction 5 to Item 404(a)).

It seems odd to bifurcate the disclosure like this, but I think Item 404 is broad enough to capture payments from the settlement that fall outside the scope of Item 402, and the SEC has acknowledged that duplicative disclosure may be required in some cases. See the discussion on p. 7 of Chapter 12 of the Executive Compensation Disclosure Handbook.
-John Jenkins, Editor, CompensationStandards.com, CCRCorp 5/10/2021

For purposes of determining who is an "executive officer" for NYSE 303A.05(b), do companies follow the definition of executive officer in Rule 3b-7 or of officer in 16a-1(f)? Has there been any guidance from NYSE on the issue?

RE: It's the Rule 16a-1(f) definition. The NYSE addresses this issue in the FAQs on 303A that are posted in the "NYSE Guidance" Practice Area on TheCorporateCounsel.net.
-John Jenkins, Editor, Compensationstandards.com 3/28/2021

A college-graduate child of an executive officer or director is employed by the company in an entry-level role. I have found 2 key interpretations here, 230.07 and 230.13. 230.07 is clear that if the child of a director (or, presumably an executive officer) is employed by a company and is paid more than $120,000, that compensation is a disclosable related-party transaction. 230.13 discusses a more obscure fact pattern for the child of a non-NEO executive officer, and DOES NOT reference the $120,000 threshold. It would not make sense for there to be a $120K threshold for disclosure of the child's compensation if their parent is an NEO or director, but NOT if the parent is non-NEO executive. In the circumstance covered by 230.13 (child of non-NEO EO), does the $120K threshold apply? Second question: If the child's compensation exceeds $120K, it seems fairly clear from the text of S-K 404 that you have to disclose the specific amount. It would seem to not be enough to say "child's compensation exceeded $120K." A very small number of companies on an Intelligize search took the latter approach in recent filings, should that be assumed to be not totally correct? Thank you

RE: I don't think Reg S-K CDI 230.13 is intended to expand the coverage of Item 404 below the $120K threshold. I think it is simply intended to illustrate the limits of Instruction 5a to Item 404(a) and show that there may be situations where an executive officer's compensation may not have to be disclosed but the non-executive officer child's may need to be.
I agree that Item 404 requires the disclosure of the amount involved in a related party transaction, and that statements to the effect that an individual's compensation "exceeds $120K" don't appear to fully comply with the requirement.
-John Jenkins, Editor, CompensationStandards.com, CCRCorp 3/4/2021

RE: Thank you for the thoughtful, clear response. I hoped and figured as much.

The interplay of S-K 402 and S-K 404 is an odd (and complicated) phenomenon.
-3/5/2021

Is a leased employee a consultant who can receive equity grants under a stock incentive plan registered on a Form S-8 registration statement?

RE: The Staff distinguishes between "consultants" and "quasi-employees." I think individuals who provide services in the typical leased employee arrangement would be regarded as quasi- or de-facto employees. As discussed in our Form S-8 Handbook, those persons would have to satisfy certain criteria in order to be eligible to receive securities registered on a Form S-8. This excerpt from p. 39 of the Handbook provides the details:

"Corp Fin interpretations make a distinction between traditional consultants—who are providing specific and limited services—and “quasi-employees,” who are providing services in something more akin to a traditional employment arrangement. This kind of “de-facto” employment relationship may exist where a non-employee provides the company with bona fide services that traditionally are performed by an employee, and the compensation paid by the company for those services is the primary source of the person’s earned income. For example, a doctor providing medical services to an HMO would likely be deemed a quasi-employee, while a doctor providing advice to a biotechnology company on the development of a new product would likely deemed a consultant.

Quasi-employees are not eligible for Form S-8 unless they receive at least 50% of their income in a calendar year from the issuer. For example, insurance agents who are exclusive agents of the issuer, its subsidiaries or parents, or who derive more than 50% of their income in a calendar year from those sources, would be eligible."
-John Jenkins, Editor, CompensationStandards.com, CCRCorp 3/2/2021

Reposting a question received on TheCorporateCounsel.net Q&A forum for readers of this forum: If a company reimburses a director for HSR filing fees associated with that director's personal HSR obligation, would that implicate the bright-line 120K compensation rule under Nasdaq/NYSE -- I don't think it's director comp -- and audit committee prohibition against payments other than director fees?

RE: Here is John's response that he posted in TheCorporateCounsel.net Q&A forum:

Having the company pick up the cost of an HSR filing that's a personal obligation looks a lot like a perk to me for purposes of Item 402 of S-K, so I'd be hard pressed to conclude that the NYSE would say it's not comp.
-Lynn Jokela, CompensationStandards.com 2/25/2021

I'm surprised how few companies are reporting 2020 annual incentives that were granted pursuant to Compensation Committee discretion in the "Bonus" column of the Summary Compensation Table. Most seem to continue to be reporting all 2020 annual incentive amounts in the "Non-Equity Incentive Plan Compensation" column, even though there was a failure to meet pre-established performance measures under the annual incentive plan. Is there legit grounds for such reporting of all annual incentive in the Non-Equity Incentive Plan column, rather than as bonus? I note that in Question 119.02 of the SEC Staff’s Regulation S-K Compliance and Disclosure Interpretations, the SEC Staff stated: “If, in the exercise of discretion, an amount is paid over and above the amounts earned by meeting the performance measure in the non-equity incentive plan, that amount should be reported in the ‘Bonus’ column.” Thanks for your thoughts.

RE: I think you're correct - annual incentives paid under the circumstances you describe above should be reported under the bonus column. See the discussion beginning on p. 50 of Chapter 6 of the Executive Compensation Disclosure Treatise.

I suppose such treatment might be appropriate in the case of companies that implemented a short term incentive plan in response to the pandemic and provided performance targets that were lower than those established in the pre-existing plan. (Question 119.02 says that length of the performance period isn't relevant so that a plan serving as an incentive for a period less than a year would be considered an incentive plan).

But I also think there are probably a number of companies that are simply marking up last year's proxy and assuming that an award under their incentive plan should be reported in the same place as it was last year, even if discretion was exercised.
-John Jenkins, Editor, CompensationStandards.com, CCRCorp 2/19/2021

Would a retirement gift to an NEO need to be reported in the SCT? If so, would it be reported as a perq or otherwise as Other Compensation?

RE: I think it would be reasonable to classify this as a perquisite or other personal benefit, which means that it would be reportable in the SCT if the aggregate value of all perks is equal to or greater than $10,000.

In our Executive Compensation Disclosure Treatise, see the discussion on page 83 of the "Summary Compensation Table" Chapter about reporting compensation in the category that's the "best fit" - as well as the discussion beginning on page 136 about gift cards and the sample disclosure on page 145 that includes disclosure about a gift in the footnote to the SCT. Also see our "Perks" Chapter.

Of course, when you're determining which category of compensation is the "best fit," you shouldn't do so in a way that requires mental gymnastics in order to conclude that disclosure isn't required. There needs to be a reasoned analysis backing the disclosure decision. -Liz Dunshee, Managing Editor, CompensationStandards.com 2/7/2021

Q: A registrant’s CEO retired in FY 2018. At such point, a director was appointed as PEO. In connection with his appointment as PEO, he was granted an RSU that would vest upon the earlier of (a) one year from the date of his employment and (b) the commencement of employment of a new CEO. However, the RSU provided for deferred settlement until the two-year anniversary of the grant date. A new CEO was hired in FY 2019 and the individual stepped down as PEO and transitioned back to director. The individual was an NEO for FY 2019 since he served as PEO during that year. At no point during FY 2020 was he PEO or an executive officer. However, the RSU was settled in FY 2020 (and taxes withheld via a W-2). We are getting tripped up as to whether the individual could be considered an NEO for FY 2020 pursuant to Item 402(a)(3)(iv). We are aware of the guidance suggesting that the provision of Item 402(a)(3)(iv)—designating up to two additional NEO’s for whom disclosure would have been provided “but for the fact that the individual was not serving as an executive officer” as of fiscal year-end—applies only to former NEOs whose employment (or service as an NEO) terminates during the year. We are also aware of TCC’s take with respect to an officer that becomes an executive officer likely being able to not be included as an NEO. In this case, however, the individual did not depart during FY 2020 (but rather at the beginning of FY 2019) and therefore he was never at any point during the year “an individual for whom disclosure would have been provided pursuant to” 402(a)(3)(iii). It doesn’t seem like the SEC would be trying to capture someone who departed as an executive officer prior fiscal year, as that seems a little far-fetched. Do you have any thoughts on whether it would be reasonable to exclude this individual as an NEO for FY 2020?

RE: If the individual was not serving as an executive officer at any time during the 2020 fiscal year, I don't believe it would appropriate to characterize him as an NEO. The "up to two additional persons" disclosure requirement was added in 1993 in order to avoid situations where it might be possible to avoid compensation table disclosure of severance arrangements entered into with executives who left their positions before year end. Here's an excerpt from the adopting release (Release No. 33-7032):

“Item 402(a)(3) previously required compensation disclosure of the CEO and each of the four most highly paid executive officers (whose compensation exceeded $100,000) employed at fiscal year-end. Finding that these requirements provided an incomplete picture of the registrant’s compensation package when highly paid executives departed prior to fiscal year end, the Commission proposed to amend the rule to apply as well to any person who served as CEO during the latest fiscal year and any other executive officer who departed during such year but whose reportable salary and bonus would place them in the group of four highest paid executive officers.”

The adopting release for the 2006 amendments (Release No. 33-8732A) also supports the position that this was the rule’s intent:

“In addition, as was the case prior to these amendments, up to two additional individuals for whom disclosure would have been required but for the fact that they were no longer serving as executive officers at the end of the last completed fiscal year shall be included.”

I've not seen any guidance to suggest that Item 402(a)(3)(iv) would require disclosure of persons who did not serve in an executive officer capacity at any time during the most recent fiscal year.

See the discussion on pages 21-25 of Chapter 3 of the Executive Compensation Disclosure Treatise.
-John Jenkins, Editor, CompensationStandards.com, CCRCorp 1/10/2021

Q: A company just lost both its emerging growth company and smaller reporting company status at the end of 2020 and is now a large accelerated filer. Can this company take advantage of the longer transition period for SRCs for purposes of its executive compensation disclosure in its proxy statement to be incorporated by reference into its Form 10-K for 2020 and not include a CD&A or the full blown executive compensation tables for non-SRCs and begin providing non-SRC disclosure in its first quarter 2021 Form 10-Q? Thank you in advance.

RE: I haven't seen any guidance on this topic, but my sense is that the EGC status and SRC status are separate and independent determinations. Since that's the case, I would argue that if you were an SRC prior to the Q2 2020 determination date, you could rely upon the rules that apply to companies transitioning from that status, even if you also lost EGC status at the same time.

Refer to our Smaller Reporting Companies - Exiting Status Checklist for other issues to consider.
-John Jenkins, Editor, CompensationStandards.com, CCRCorp 1/4/2021

RE: In a telephone call, the SEC staff confirmed your answer, John. Thank you.
-1/7/2021

RE: Even a blind squirrel finds an acorn every now and again! Thanks for letting us know.
-John Jenkins, Editor, CompensationStandards.com, CCRCorp 1/7/2021

Q: Is there any limitation on who can be appointed a beneficiary of a director's stock unit account under a deferred compensation plan? Is there any reason why a charitable organization can't be a beneficiary and receive the shares?

RE: Would Form S-8 prevent this or is this okay under General Instruction A.1(a)(3)? I know it's not okay under General Instruction A.1(a)(5) but this is different.
-12/29/2020

RE: I think the first issue is whether the plan permits such a transfer. Many don't permit award transfers prior to settlement. In terms of the use of S-8 to cover shares to be awarded to a charity upon settlement of an RSU, I don't think that's permitted unless the charity in question can be squeezed into General Instruction 1(a)(5)'s definition of a "family member." The charity is not an eligible recipient for purposes of Form S-8. I think it's important to keep in mind that the SEC definitively rejected a proposal to allow charities to be transferred options registered on Form S-8 when it adopted changes that permitted transfers to family members. Here's an excerpt from the relevant release:

"Although an option exercise by a Section 501(c)(3) charity, for example, may not abuse Form S-8 for capital-raising purposes, the charity is not likely to have a pre-existing relationship with the issuer that would justify use of the abbreviated Form S-8 disclosure. While we seek to facilitate employees’ estate planning through the amendments we adopt today, we must keep in mind that investor protection is our primary objective. To permit entities that are not controlled by, or for the primary benefit of, an employee’s family members to exercise options on Form S-8 would suggest that the abbreviated Form S-8 disclosure is adequate for the offer and sale of securities to non-employees generally. As discussed above, we remain firmly persuaded of the contrary view."
-John Jenkins, Editor, CompensationStandards.com, CCRCorp 12/29/2020

RE: I wonder if the Staff would make a distinction from the quote in the release in this instance where the director is dead and his benefits, including shares that are issued to settle a stock unit award, are being issued to a charitable organization as opposed to an exercise of an option during the lifetime of the director, the latter being the subject of the quote and involving an investment decision. A distinction is that here the director is dead and there is no subsequent investment decision being made by the charity. I have a call into the SEC Staff on this, but thought others may know the answer since I have to believe it's been asked before.
-12/29/2020

RE: Based on a conversation with the SEC Staff, the designation of a charitable organization as a beneficiary in this instance is okay and covered under the first sentence of General Instruction A.1(a)(3). While the second sentence to that instruction (as well as the language in the Form S-8 release quoted above) confuses the matter, this situation is such that it is okay because this isn't the type of situation that abuses Form S-8 per the SEC Staff. Hopefully this will be documented in a written interp or other writing at some point so it is clear for folks.
-12/29/2020

RE: Very helpful. Thanks for letting us know!
-John Jenkins, Editor, CompensationStandards.com, CCRCorp 12/29/2020

Q: When Directors voluntarily elect to receive a cash retainer payment in the form of equity based compensation subject to vesting, should that amount be reported in the Fees earned and paid in Cash column with a footnote? Or, does the value need to be reported in the stock awards column of the Director Comp table? Guidance for handling this circumstance in the Summary Comp Table for NEO's is to keep it in the salary column. but there is no mention about how to report for Director Compensation.

RE: See the discussion on pages 36-38 of Chapter 11 of the Executive Compensation Disclosure Treatise regarding the treatment of equity received in lieu of retainer & meeting fees. That discussion addresses both equity that is received in lieu of fees without a vesting requirement and equity that is subject to a vesting requirement, and concludes that:

1. The fees forgone at the election of the director are to be disclosed in the “Fees Earned or Paid in Cash” column of the table;

2. The receipt of the non-cash compensation is to be disclosed in a footnote to this column; and

3. The actual number of shares (stock or options) received in lieu of the fees is to be reported as part of the aggregate number of stock awards and the aggregate number of option awards outstanding at fiscal year-end, as required by the Instruction to Item 402(k)(2)(iii) and (iv) to the extent that the stock award is unvested and the option award is unexercised.
-John Jenkins, Editor, CompensationStandards.com, CCRCorp 12/28/2020

Q: A company has an insured disability plan for its rank and file employees that contains an overall cap on the monthly ltd benefit. For its executives, it will provide them 80% of the sum of salary and target bonus with no cap on the amount payable. This is clearly a perk. The company has not valued this perk because it is self-insured (no aggregate incremental cost). Shouldn't a value be calculated (e.g., what would this cost if it was insured)?

RE: See the discussion on valuation of perks beginning on p. 21 of Chapter 7 of the Executive Compensation Disclosure Treatise. The SEC's position is that aggregate incremental cost is the only basis for reporting perk values. If a particular perk does not involve any aggregate incremental cost to the company, then to the extent that the minimum disclosure threshold is triggered for an NEO, the item should be described in the footnote to the “All Other Compensation” column of the Summary Compensation Table, but with no dollar value added.
-John Jenkins, Editor, CompensationStandards.com, CCRCorp 12/28/2020

Q: We are also posting this question in the Corporate Counsel Q&A Forum: Company makes stock matching contributions to participants in its 401(k). The match is of such a nature that registration on S-8 is required. The company, for administrative purposes, deposits the stock for the match after year end (e.g., in February) for all employees that were employed at year end and all retirees that retired during the year. Does the S-8 registering the matching shares cover the after-year-end contribution to the now retired employees (i.e., they are now "former employees")? Same question for employees who were employed at year end but have left in the interim? Arguably, the investment decision/transaction being registered occurred during the previous year while the recipients were still employees, but ultimately the stock is not delivered until the following year and after the employees have left the company. In short, do the employees/retirees who receive the stock contribution have to be current employees at the time the contribution is made for the shares to be covered by the S-8? Does the analysis change if the company has the option (in its discretion) to deliver cash or stock as the match and company does not make such decision until after year end?

RE: General Instruction A.1(a)(3) to Form S-8 provides that the term employee also includes "former employees," but only to permit registration on Form S-8 of (i) the exercise of employee benefit plan stock options and the subsequent sale of the securities, if such exercises and sales are permitted by the plan, and (ii) the acquisition of shares pursuant to intra-plan transfers among plan funds, if permitted by the plan. The stock contribution in the facts presented does not fit into either of one of these fairly narrow applications. However, the purpose of the S-8 is to register shares issued pursuant to employee benefit plans.

Presumably, the SEC Staff extended the application of the Form S-8 to stock option exercises by former employees because the grantee was granted the option while employed by the issuer by reason of he or she being employed by the issuer, and so, notwithstanding the nature of the option that permits post-termination exercises, it is nonetheless covered by the S-8. Similarly, under the facts presented, the former employee earned a "right" to the stock while employed by the issuer by reason of he or she being employed by the issuer - both by being a participant in the employee benefit plan and remaining employed by the issuer on the match determination date. Accordingly, it seems reasonable to me to take the position that the S-8 should cover the stock issued, despite the fact that the administrative delay in actually crediting the stock happens to fall at a time when the employee is no longer employed by the issuer.
-11/15/2013

RE: Does the same reasoning provided above apply to issuances to former directors of shares previously credited to a stock unit account under a deferred compensation plan?
-12/27/2020

RE: I think that it likely would. Instruction 1(a)(1) defines the term "employee" to include any director, so I don't think there's a basis to differentiate between the treatment accorded to former employees and former directors in this situation.
-John Jenkins, Editor, CompensationStandards.com, CCRCorp 12/28/2020

Q: We know that independent contractors are not employees for purposes of the pay ratio employee population. Would paid interns be considered employees? Many thanks in advance for your help!

RE: I haven't seen this addressed anywhere, but my assumption is that the answer depends on whether the paid interns are regarded as employees under applicable labor laws. See the Orrick blog & DOL guidance.
-John Jenkins, Editor, CompensationStandards.com, CCRCorp 12/18/2020

Q: A company's headquarters (HQ) is effectively closed due to the COVID-19 pandemic (employees assigned to that location are required by the company to work from home unless they are unable to perform their daily duties from home, in which case they are working at the HQ). All Executive Officers assigned to the HQ are working from home. Several Executive Officers are working from their residences in other states which in some instances, the residence is the "primary" residence as it is where the Executive Officer's spouse and children live full-time (i.e., the Executive Officer commutes weekly and maintains an apartment in the city of the HQ). If the Executive Officer needs to travel to the location of the HQ during the pandemic for a legitimate business reason (e.g., for work that cannot be done remotely and must be performed at or near the HQ such as a participating in an important customer meeting), is the travel from the out-of-state residence to the city of the HQ commuting and thus a perquisite if the company pays the travel expenses? Although under normal circumstances such a trip would be considered commuting, I believe an argument can be made that such travel is directly and integrally related to the performance of the executive’s duties under these circumstances given the company’s COVID-19-related work-from-home requirement (under normal circumstances, the Executive Officer would not be living full-time at the out-of-state residence). Thoughts?

RE: I think you can make that argument, although I'm not sure how receptive the Staff will ultimately be to it. The tough thing about this argument is that you're trying to fight your way out of a pretty clearly delineated box. As you note, payment of commuting expenses is one of the categories that the SEC has specifically referenced as being a perk. So, all of your eggs are in the pandemic basket, and your argument is essentially that in 2020's new normal, where work from home is requirement, the fact that the destination is nominally a HQ facility should not result in occasional travel to that facility being regarded differently from any other type of business travel.

In other words, under pandemic operating conditions, travel to the HQ should not be regarded as commuting, because it is not the place where the executive customarily performs his or her services. Conceptually, I don't think that's a bad argument. In fact, if you look at the discussion of business travel v. commuting expense that begins on p. 58 of Chapter 7 of the Executive Compensation Disclosure Treatise, you'll note that the authors indicate that a test for commuting expenses based on whether the executive “mainly works” at the place to which she is traveling is potentially supportable. The authors go on to caution, however, that "not everyone signs on to the notion that travel is a perk if (and only if) the travel is to the executive’s “main” place of work."

Since you're basically making a "main place of work" argument, I think your position would be strengthened if you could demonstrate that the company's pandemic protocols mandated that all HQ personnel who could work from home should work from home, that overall HQ operations were far from business as usual, and that the executive did not have an option to work at the HQ facility absent a compelling business need for his or her presence there.

It also would be helpful if this work from home requirement continued for an extended period, and did not, for example, end when the first round of mandatory lockdowns ended in late spring. I think you would also be helped with your argument if you could demonstrate that travel to the HQ facility by the company's executives was infrequent and that there were unique circumstances in each instance that required the executive to travel to the facility, notwithstanding an otherwise applicable work from home policy.
-John Jenkins, Editor, CompensationStandards.com, CCRCorp 12/16/2020

Q: Any thoughts on the following hypo? Public Company A owns 30% of investment in Private Company B. Company B is not consolidated. Two A directors (independent) sit on B. Those A directors do not own stock in B, and otherwise have no relationship with B. 1. What if B pays those directors garden variety cash director fees? Any thoughts about that being as A's compensation disclosure requirement for those directors? On its face, I would have said no. Also, don't believe there is a 404 related party transaction because it isn't clear to me A is a participant in the transaction (and even then, is there really a material interest in garden variety director fees?). Likewise, this should not impact independence — these are normal course director fees paid by B, not A (and even then, these are director fees). 2. What if, instead, B paid A some type of fee arrangement (like a management fee). The Board may, or may not, decide to pay those directors some additional fees. It seems to me that if they DO pay additional fees, those are disclosable as compensation. What about 404? Clearly, A is a participant now, but the transaction is with B (not the directors), and given that the directors don't own any stock in B and are only directors, it isn't clear to me that B is a party covered by 404 (you would have to look through B and somehow determine you are really dealing with a director). Still don't think you have an independence issue, unless you somehow viewed all of this as consulting arrangements (rather than director fees). Any reactions to this would be wonderful.

RE: In the first scenario, I think I'm more comfortable with the conclusion that the director fees paid by Company B would not be included in Company A's director comp disclosures than I am with the conclusion that Company A would not be required to disclose the fees as a related party transaction. However, I note that you refer to the 30% interest as a "joint venture" in your caption, and so it is possible that payments from the JV entity to the directors could be regarded as director fees subject to disclosure under the "All Other Compensation" column under Item 402(k)(2)(7)(F).

The concept of "participation" is very broad under Item 404, and I think you'd need to inquire much more deeply into how those individuals became directors of Company B and what their role is on the board. For example, if they are serving as director designees of Company A, then their service and compensation is indirectly at the behest of Company A, and it isn't too much of a stretch to conclude that Company A is participating in the arrangement. Here's an excerpt from p. 18 of our Related Party Transactions Disclosure Handbook on the "participant" concept:

"Being a participant encompasses situations where the company benefits from a transaction but is not technically a contractual party to the transaction. In response to concerns that the concept of a “participant” might be too broad and far-reaching, the SEC offered the following example of a case where disclosure might be required even if the company is not a contractual party: “[d]isclosure would be required if a company benefits from a transaction with a related person that the company has arranged and in which it participates, notwithstanding the fact that it is not a party to the contract.” See the 2006 Adopting Release at footnote 418."

In the second scenario, I think additional fees payable by Company A to its directors for service as its representatives on Company B's board would be disclosable under Item 402. The best place for that disclosure seems to me to be in the "All Other Compensation" column. Whether a situation in which the Company A director serves without additional compensation as a Company B director, but Company B pays a management involves a related party transaction under Item 404 seems to me to depend on whether the directors may be regarded as having a "material interest" in the transaction. I think that's less likely if they aren't being compensated for their service and don't have an equity interest in Company B, but unfortunately, the guidance here is very murky, so I would take a hard look at the relationship before concluding that a material relationship doesn't exist. See the discussion on pgs. 26-28 of the Handbook.
-John Jenkins, Editor, CCRCorp 12/7/2020

RE: Thanks so much for your feedback, and agree a close look is needed
-12/10/2020

Q: If a company generally does not separately compensate directors for committee service other than retainers for chairs of standing committees but, in connection with establishing a special committee to evaluate a related party transaction, agrees to pay certain fees to the committee members, must that be reported on Form 8-k under 5.02(e)?

RE: Not unless the CEO, CFO or an NEO is a member of that committee. Item 5.02(e) isn't triggered by a decision to pay compensation to non-employee directors. If you elected a new director other than at a shareholders' meeting and designated that individual to serve on the special committee, then the compensation arrangements for that person would need to be disclosed under Item 5.02(d).
-John Jenkins, Editor, CCRCorp 12/9/2020

Q: We have seen varying approaches to disclosing matters pertaining to cash bonus plans. While the authority seems to be that a Form 8-K report should be filed to report the adoption of such a plan, setting forth the general parameters of the plan, it appears that many companies omit any such filing and simply include in their Item 402 proxy disclosures a summary of the terms of the prior year's plan and the amounts paid pursuant thereto (and include such amounts in the SCT). Is there any guidance of which you are aware as to whether the latter approach is acceptable? Thanks.

RE: In looking further, it appears that, without necessarily expressly saying so in the 402 disclosure in the proxy/10-K, issuers may be relying upon provisions in umbrella long-term incentive plans that authorize cash awards to justify omitting 8-K disclosure on the basis that the authority to grant such awards is provided in the plan and the 402 disclosure provides the necessary details regarding the terms on which such bonuses were determined. Is that a reasonable approach?
-12/3/2020

RE: In the case of previously disclosed plans, I think that's a fairly common approach if the awards are "materially consistent" with the terms of the plan. See the discussion beginning on p. 37 of Chapter 17 of the Executive Compensation Disclosure Treatise for a more detailed analysis.
-John Jenkins, Editor, CompensationStandards.com12/3/2020

Q: Our board is expecting to approve a Form Severance Agreement/CIC Plan for our executive officers. The form agreement will not contain the exact level of benefits for each participant (i.e., 2x salary). This information will be provided to each participant on a term sheet to be executed by the participant and the company (to be executed at a future date). All information regarding the level of benefits for each participant will be known at the time the board approves the form agreement. Is it appropriate to assume the 8-K trigger is the date the board approves the form agreement/plan? If the body of the 8-K contains the information for each participant's level of benefits, then would it be appropriate to only file the form agreement (rather than also filing the participant term sheet at a future date)? A form of the participant term sheet will be included as an exhibit to the form agreement. Thank you.

RE: If only board approval is required, then the date that the board adopts the plan is the triggering date for an 8-K. Instruction 2 to Item 601(b)(10) generally provides that a company need only file copies of the various compensatory plans and need not file each individual director's or executive officer's agreement "unless there are particular provisions in such personal agreements whose disclosure in an exhibit is necessary to an investor's understanding of that individual's compensation under the plan."

Assuming all of the other terms are the same, I don't think the fact that the level of benefits provided under the plan will differ among the various executives would preclude you from relying on this instruction and filing a "form of" agreement.
-John Jenkins, Editor, CCRCorp.com 11/10/2020

Q: In addition to stock ownership and retention policies, do you see companies restrict executives from selling more than X% of their shares (assuming stock ownership guidelines compliance) during an open window or other time period, in order to limit the amount of executive selling?

RE: I've heard of some companies using a general guideline — e.g., not more than 25% of vested holdings — but I don't think it's common to have a hard and fast rule. The issue that you run into with having a guideline is that people will then feel it's acceptable to regularly sell up to whatever maximum you've set. You'll also be faced with having to oversee compliance and respond to the inevitable requests for exceptions. Sometimes there are valid reasons for large sales, like the executive is buying a house, but you don't necessarily want to be the arbiter of that. Most companies, even those who have some sort of guideline in place, emphasize that the size of the sale is ultimately the executive's decision, but there are negative market perceptions of large sales and they trust the executives will act with that in mind.
-Lynn Jokela, Associate Editor, CompensationStandards.com 10/30/2020

Q: A NASDAQ Global Market listed company intends to adopt/submit to shareholders a new omnibus equity compensation plan. It will be the only plan under which the company grant equity awards going forward. Are you aware of publicly available surveys or statements of rules of thumb regarding the number of shares to reserve for future issuance under an equity compensation plan? Anecdotal data has indicated that reserving 3% - 5% of outstanding shares may be a reasonably customary range, but I am looking for a survey or other objective/statistical report to provide to the company. I realize that the number of outstanding awards under old plans are likely a consideration. Any thoughts would be appreciated.

RE: I agree that 3% - 5% is the reasonably customary range for the number of shares to reserve.

One source of the data you are looking for is the Riskmetrics (ISS) annual stock plan dilution survey. The survey is available for purchase in the ISS Governance Bookstore. The 2008 survey has not yet been published, so the latest data is for companies with fiscal year-ends between April 1, 2005 and March 31, 2006, and that filed their proxy statements with the SEC on or before July 31, 2006. The average potential dilution from share reserve proposals in that period was 4.3% of shares outstanding.
-Dave Lynn, Editor, CompensationStandards.com 3/19/2008

RE: Any updated benchmarks on this topic? Thanks.
-10/8/2020

RE: I think all questions relating to equity plan design have only gotten more complicated than they were when Dave first responded to this question (which predated ISS's implementation of its EPSC). That being said, I think Dave's numbers from 2008 are likely still in the ballpark, given ISS's burn rate tables and some recent data from Compensia on share reserves at tech companies.
-John Jenkins, Editor, CompensationStandards.com, CCRcorp. 10/8/2020

Q: Would you please provide some examples of "costless perks" beyond the usual ones such as access to corporate boxes or seats at concert venues or sports stadiums? What are the facts and circumstances that typically justify categorizing a perk as "costless" and limiting disclosure to a description of the benefit in a footnote to the Summary Compensation Table and not disclosing a value? Many thanks.

RE: This isn't an issue that's received a lot of attention, probably because truly costless perks are pretty rare, aside from the items you mentioned. You might find the discussion in Topics #1261 and #774 helpful.
-John Jenkins, Editor, CompensationStandards.com, CCR Corp. 9/29/2020

RE: Thanks, John, for the helpful reply. I hope that you and your family are doing well. I agree that it is an unusual question that will be highly dependent on the facts and circumstances of each perk.
-9/29/2020

RE: I also checked in with Mark Borges for his thoughts on this question, and here's what he had to say: In my experience, the common situation is spousal/family travel on company aircraft with an executive where there is no incremental cost associated with their presence. As you’ve noted, other common examples include free tickets at events where the company is already a sponsor and the sponsorship is accompanied by a specified number of tickets to the event that are then distributed to executives so that the tickets get used. It may also include use of company products where there is no additional cost associated with letting the executive use the product (like a laptop or a phone) to "try it out" since it represents excess inventory.

I checked through my records on perquisites and came up with the following additional fact patterns that may fall into the "costless" category:

1. Initial club membership initiation fee that the Company paid years ago, but is offering to transfer membership to an executive who is willing to pay the ongoing membership dues on an individual basis. I believe that some of us thought back in 2018 that the sunk cost of the original initiation fee could be disclosable as a perquisite in the year of the membership transfer, but probably wouldn’t continue to disclose going forward.

2. Company pays expenses for executive and spouse to attend company-sponsored awards program, but entire expenses for program are reimbursed to the company by a vendor, so company ultimately doesn't incur any aggregate incremental cost for the trip.

3. Executive makes personal use of corporate aircraft, but only reimburses aggregate incremental cost, not the full cost (which, presumably, would include some portion of the fixed costs of the flight).

Granted, these are all highly unusual fact patterns, which leads me to believe that costless perquisite situations don't come up all that often.
-Liz Dunshee, Managing Editor, CompensationStandards.com 9/29/2020

RE: My sincere thanks, Liz and Mark. I appreciate the extra effort and hope that you and your families are safe and sound.
-9/29/2020

I'm enjoying the Proxy Disclosure Conference, and one of the topics is clawbacks. For those who are new to the topic, are clawback provisions required? Is that what the Dodd-Frank rules are supposed to do? Thanks!

RE: Yes. Section 954 of the Dodd-Frank Act requires the SEC to implement rules requiring a new listing standard, which requires listed companies to adopt clawback policies for current and former executive officers. Section 954 contemplates that an issuer would be required to clawback excess incentive-based compensation paid to an executive during the 3-year period preceding the date on which the issuer is required to prepare an accounting restatement. Unlike the provisions of Sarbanes-Oxley on clawbacks, Dodd Frank doesn't require the restatement to result from misconduct.

The SEC proposed rules to implement Section 954 back in 2015. Those rules have not yet been adopted, and as Mike Melbinger blogged earlier this year, it looks like the SEC may issue further proposed regulations later this year.
-John Jenkins, Editor, CompensationStandards.com, CCRcorp. 9/21/2020

Q: We have an Item 402 disclosure question under the following scenario: a company’s compensation committee approved its cash bonus program in February/March with its normal cash bonus plan parameters. Then, because none of the original performance goals would likely be met due to COVID-19, the committee adopts a new cash bonus program later in the year (replacing the original program) that provides incentives for the remainder of the year. What would the company need to disclose in the Grants of Plan-Based Awards Table about the original bonus program if it was replaced by a new program? Thank you!

RE: Mark Borges notes: Reading through Item 402(d), which talks in terms of "each grant" of an award to a named executive officer that has been made during the fiscal year, I would think that you should consider disclosing both plans in the Grants of Plan-Based Awards Table.

In terms of what you should say about the original bonus program, I would recommend including identifying the plan (which might require adding a separate column after column (a) and before column (b) to identify each plan), then adding in the estimated possible payouts under the original plan (in the appropriate columns) with a footnote indicating that the plan was replaced by a new plan mid-year as a result of the COVID-19 pandemic.

To me, the amount of detail that you go into on the original plan is somewhat dependent on what you say about the original plan in the Compensation Discussion and Analysis. My instinct is to put most of the detail in the CD&A and provide a cross-reference in the footnote to the Grants of Plan-Based Awards Table.
-Liz Dunshee, Managing Editor, CompensationStandards.com 8/26/2020

Q: Is it typical for the Compensation Committee to have express authority under its charter for oversight of benefit plans and D&I initiatives?

RE: Recent data shows that 69% of Fortune 100 companies now expressly assign board or comp committee oversight for human capital. That’s up from 28% in 2017. I think we are reaching a tipping point and that investors and companies are recognizing it’s a very important issue that would benefit from express board oversight. Sometimes a different committee has responsibility, but it's typically the compensation committee. I recently blogged about this on our "Advisors' Blog."

We also have a panel about the Comp Committee’s role in HCM at our "Proxy Disclosure & Executive Pay Conferences" next month, featuring Keir Gumbs of Uber, Blair Jones of Semler Brossy and Maj Vaseghi of Freshfields. You'll be able to get the latest info from these experts if you register!
-Liz Dunshee, Managing Editor, CompensationStandards.com 8/15/2020

Q: We will be registering “plan interests.” For purposes of the reservation of shares, is that a set number based on shares in the plan? Or is it an indeterminate number based on every transaction within the plan, such as employee decision to buy or sell shares?

RE: It's an indeterminate number and per Rule 416(c), that's what people register. Here's what Rule 416(c) says:

"(c) Where a registration statement on Form S-8 relates to securities to be offered pursuant to an employee benefit plan, including interests in such plan that constitute separate securities required to be registered under the Act, such registration statement shall be deemed to register an indeterminate amount of such plan interests."
-John Jenkins, Editor, CompensationStandards.com, CCRcorp 7/7/2020

Q: In the first CD&A after exiting EGC status, a company adds the 4th and 5th NEO (neither were NEOs in prior years). Does the company have to report three years of compensation data in the Summary Compensation Table for the two new NEOs, or can the company just provide one year and footnote that these two individuals were not NEOs in prior years (the company only had three NEOs since it was an EGC). Thank you!

RE: Although it doesn't call out emerging growth companies specifically, Question 119.01 of the Staff's Reg S-K CDIs says that when an executive officer becomes an NEO for the first time, the Summary Compensation Table needs to include only the exec's pay for the last completed fiscal year — and not their pay for the two preceding fiscal years. So your approach seems reasonable in light of that interpretation.

Note that CDI 119.18 says that pay data is required for all three years for people who are moving in and out of NEO status.
-Liz Dunshee, Editor, CompensationStandards.com 7/1/2020

Q: Is there a reporting obligation under Item 1.01 on Form 8-K for a one-way agreement regarding the facts below? The Company’s Articles provide that it will indemnify its directors to the fullest extent allowed by Delaware law. There is no separate indemnity agreement. The company would like to enter into a reimbursement-type agreement with the directors before they advance any funds for a claim. The agreement would state the director will reimburse the advances in the case that the court finds that the director is not eligible for indemnity rights. I have not seen an agreement like this, but I have also found that there is a reporting obligation for an indemnification agreement. CD&I Question 117.16 Under Item 601(b)(10)(A) of Regulation S-K , there is a reporting obligation when the registrant enters into an agreement with a director if it is not "immaterial in amount or significance." Is this a material agreement?

RE: The conservative answer is to file the undertaking, but I don't think a lot of companies do. I think that many companies with publicly filed indemnity agreements often view the undertaking as nothing more than a required delivery, rather than a separate material contract, particularly since its required terms are usually laid out in the contract.

A lot of companies that don't have indemnity agreements have mandatory advancement baked into their bylaws, and those publicly filed bylaws often lay out the required undertaking language as well. In these situations, I think some companies simply conclude that the undertaking is just a procedural formality to permit the exercise of a right that the officer has under the bylaw.
-John Jenkins, Editor, CompensationStandards.com, CCRcorp. 6/25/2020

Q: Are there any recommendations/best practices regarding who should engage outside executive compensation counsel? Compensation Committee? Management/issuer? Board? The issuer has engaged separate general securities/corporate counsel. Thank you!

RE: If the committee needs independent legal counsel, then it should decide who that counsel is, and that counsel should report directly to the committee. I think many comp committees don't routinely retain separate counsel, and often work with the company's existing internal and outside counsel on the legal aspects of executive compensation plans and arrangements.
-John Jenkins, Editor, CompensationStandards.com, CCR Corp. 6/15/2020

Q: I read Item 402(c)(2)(vi) to require issuers to report the aggregate FAS 123(R) charges recorded during the fiscal year for all option grants, including those granted in prior years (if still vesting during the fiscal year). Thus, it appears that the associated instruction requires disclosure of the assumptions underlying those particular grants. Although the instruction permits a cross-reference to financial statement footnotes or MD&A, typically those disclosures do not provide detail on a grant-by-grant basis; rather, they seem to provide weighted-average assumptions or the like, and then only for the last three years. Accordingly, a cross-reference to the financial statement footnotes or MD&A would normally not provide investors with the assumptions underlying the specific options whose expense is reported in the SCT. Nonetheless, many issuers are providing only a cross-reference to generalized assumptions about only some of the options being expensed. Has the Staff indicated that this approach will suffice?

RE: As you point out, there are some obvious limitations to simply using a cross-reference to the financial statement footnotes. In fact, Mark Borges asked David Lynn about this during our teleconference in January:

BORGES: David, just to be clear. If you have four awards reflected in your Stock Awards column, your footnote would then either have to disclose the assumptions that went into the valuation of each of those awards or a cross reference to the financial statements for the specific year in which those awards were made which would have that information?

LYNN: Yes, it should provide sufficient information so that someone could understand with respect to all those awards that are reflected in the table. And whether that's in the footnote for the current year or you have to put into the disclosure itself, you could satisfy it either way.

BORGES: Yes, the way the Instruction to Item 402(c)is drafted, it seems to assume that you would always cross reference to where the information is located, but it sounds like you're saying you could put actually include the information in the footnote if you wanted rather than include it by cross reference.

LYNN: Yes, the whole purpose of the cross reference is to streamline it since you're talking about much the same information in all of those places.

BORGES: One last point on the footnotes. My experience is that the assumption information that you typically find in the financial statements or in the financial statement footnotes reflects the weighted-average assumptions that were used across the entire employee population that received awards for that year.

To the extent that you treat your executive officers as a separate homogeneous group for purposes of determining the valuation assumptions, primarily because the expected term assumption for your executives is often different than what it may be for rank and file employees, would it still be permissible, where you have used different assumptions for the executives, to cross reference your financial statements? Or, would you, in fact, have to provide the specific assumptions that were used for the executive in a footnote to the column?

LYNN: Yes, probably the best disclosure route, although I don't believe that it's necessarily required, is in the footnote to the financial statements you might also have that information. Clearly that information may be particularly relevant when you're looking at the Summary Comp Table disclosure because there you are dealing with the individual executives that are subject to a different assumption for purposes of determining a grant date fair value.
-Broc Romanek, Editor, CompensationStandards.com 4/16/2007

RE: On a related note, is disclosure of assumptions required if the awards were so immaterial that disclosure of the assumptions was not required in the financial statements, notes, or MD&A? I note that Instruction 1 to Item 402(c)(2)(v) and (vi) only contemplates disclosure by cross-reference. Can it be taken to mean, then, that if the disclosure of assumptions was not required to be provided in the sections specified in the instruction, the instruction does not require the assumptions to be disclosed at all?
-4/26/2020

RE: I haven't seen anything on this and don't know if the Staff would find it persuasive, but I think it's a decent argument. When the SEC adopted the disclosure requirement, it chose to require disclosure about those assumptions to be made "by reference to a discussion of those assumptions in the registrant's financial statements, footnotes to the financial statements or discussion in the Management's Discussion and Analysis."

In drafting the rule, it would have been easy to adopt a standalone requirement, and permit it to be satisfied by incorporating other disclosures. The SEC didn't do that. It seems to me that this may be read to imply that the disclosure requirement is tied to the standards applicable to the disclosures required by GAAP or Item 303, and if the awards aren't material enough to trigger an obligation to disclose them in the financials or MD&A, then they shouldn't be required by Item 402(c)(v).
-John Jenkins, Editor, CompensationStandards.com, CCR Corp. 4/27/2020

Q: Can an NEO reimburse a company for the NEO's personal use of an aircraft in which the company owns a minor fractional interest without proxy statement disclosure or potential FAA violations? After reading through Perks & Other Benefits and the cited FAA’s final 2010 guidance, it appears that there are two distinct questions, one on proxy disclosure and a separate one on FAA regulations. First, costs for the airplane seem to be broken down into (i) ownership-type costs (similar to the country club membership in C&DI 119.7) and (ii) “incremental costs” (similar to the cost of meals at the country club). If the NEO reimburses the company for the incremental costs only, then the company would have to include the aircraft ownership-type costs by type in its proxy statement. If the NEO fully reimburses the company for the total cost, that is both the ownership-type costs and the incremental costs, it should not be considered a perk and would not need to be identified in the company’s proxy statement. Is this a fair reading? Second, the Treatise discusses the fact that many corporate fleets operate under FAA regulations that prohibit the company from accepting payment, except in limited circumstances. Have you run into the question of whether those regulations apply in the case of a minority fractional ownership interest rather than a 100% company-owned aircraft? (Granted this may indeed require consultation with a specialist in FAA regulations.) Looking forward to your thoughts.

RE: Here's how I understand the disclosure requirement. Assuming relevant thresholds are met, you would disclose the value of the incremental cost of the airplane use in the "All Other Compensation" column of the comp table if the executive did not reimburse the company for it.

If the executive did reimburse the company for the incremental cost, there would be no disclosure of the dollar amount in the comp table. However, the use of the airplane would still need to be described as a type of perk in the perk footnote. If the executive reimbursed the company for the total cost, no disclosure would be required, because it wouldn't be regarded as a perk.

As the Treatise discusses at length, the challenge is to come up with a reasonable methodology that sorts out what should be included in the calculation of "incremental costs," and different companies may come up with different answers to that question.

I can't address the second part of your question. I don't know what the FAA's policy is on reimbursement in the context of fractional ownership interests.
-John Jenkins, Editor, CompensationStandards.com, CCR Corp. 4/27/2020

RE: Thank you very much for the above, in addition to the extensive information in the Treatise.
-4/27/2020

Q: A company has awards that were formally approved and issued in 2020, but the grant date for accounting purposes under ASC 718 is deemed to be in 2019 because the awards finalized in 2020 reflect terms agreed in 2019. I know that for purposes of the Summary Comp Table and the Grants of Plan-Based Awards table, we should use the grant date under ASC 718, but that is not entirely clear for the Equity Comp Plan table.

RE: I'm not aware of any guidance addressing this, but it seems to me that an approach using the ASC 728 grant date would be the most appropriate one, since it is consistent with how the awards are reported in other parts of the proxy and/or 10-K. I would appropriately footnote the table.
-John Jenkins, Editor, CompensationStandards.com, CCRcorp 4/20/2020

Q: Under Item 402(k)(2)(vii)(D), a company must include in the "All Other Compensation" column of the Director Compensation Table amounts paid or accrued to any director pursuant to a plan or arrangement in connection with: (1) The resignation, retirement or any other termination of such director; or (2) A change in control of the registrant. The SEC states on page 80 of the release that distributions of nonqualified deferred compensation are not reportable as "All Other Compensation" in the Summary Compensation Table. I am assuming that these amounts do not have to be disclosed because they will be included in the Nonqualified Deferred Compensation Table for the NEOs. Because the NQDC Table is not required for directors, do you think that if a director retired during the year and received payments from the Company under his deferred compensation plan that all such payments must be disclosed in the "All Other Compensation" column of the Director Compensation Table (as per Item 402(k)(2)(vii)(D))? It seems like disclosing this amount in the "All Other Compensation" column would be repeat disclosure of compensation received in previous fiscal years because if a director deferred compensation in previous fiscal years, such amounts would have been disclosed in the appropriate column in that year. Likewise, contributions by the Company to a defined contribution plan would have been disclosed in the relevant previous fiscal years. Thanks in advance for your thoughts.

RE: I realize this question has remained unanswered since January 2007; however, I am bumping this question on the off chance someone reads this now and decides to provide insight or guidance. Thanks in advance.
-4/1/2020

RE: In my limited experience, I have not seen deferred comp distributions to retiring directors disclosed in the director compensation table. Here's Sysco's 2019 proxy statement, which discloses a director deferred comp plan that pays out on retirement, along with disclosure that two directors listed in the comp table retired during the year. While there was disclosure about above-market earnings on the deferred comp for one of the retiring directors, there was no reference to a payment or an accrual under the plan.
-John Jenkins, Editor, CompensationStandards.com, CCR Corp. 4/1/2020

Q: If a named executive officer elects to invest deferred compensation amounts in a hypothetical cash account which earns a return rate based on a corporate bond yield average as published by Moody’s, would such earnings be treated as above-market earnings and thus reportable under Item 402(c)?

RE: For a deferred compensation plan with a cash-based, interest-only return, earnings aren't reportable as “above-market” unless the rate of interest exceeds 120% of the applicable federal long-term rate. See Instruction 2 to Item 402(c)(2)(viii). For more detail and Staff guidance, see Chapter 6 of The Executive Compensation Disclosure Treatise.
-John Jenkins, Editor, CompensationStandards.com 3/12/2020

Q: Compensation Committee plans to adopt resolutions to increase the number of shares reserved for issuance under a plan and make awards under the plan that would require the increased number of authorized shares be available (but awards would be contingent on stockholder approval of amendment). Is there any restriction on the Company's ability to file an S-8 covering the increased number of shares reserved for issuance prior to the date the resolutions are adopted (to ensure that the S-8 is effective when the awards, which may include restricted stock, are made)?

RE: The one potential issue that I see with this is the need to file an Exhibit 5 opinion with the S-8. However, the Staff does generally accept Exhibit 5 opinions that assume shareholder approval of a required amendment to charter documents will be obtained. A clean opinion is required to be filed via post-effective amendment or Form 8-K. I assume the same principles would apply to a plan amendment, but have not seen anything directly addressing that. See Staff Legal Bulletin No. 19.
-John Jenkins, Editor, CompensationStandards.com 3/3/2020

RE: Thanks. We would typically phrase our opinion to read: " … the Shares have been duly authorized and, when the Shares are issued by the Company in accordance with the terms of the Plan and the instruments executed pursuant to the Plan which govern the awards to which any Share relates, the Shares will be validly issued, fully paid and non-assessable..." Before the plan is amended, the additional shares cannot be issued in accordance with the terms of the plan and thus the opinion regarding "validly issued, fully paid and non-assessable" would not need to be made subject to any additional express assumption. Once the plan is amended and the additional shares can be made the subject of awards (with any award agreements being made contingent on receipt of stockholder approval of the amendment), the opinion regarding "validly issued, fully paid and non-assessable" would apply to those additional shares. Do you see that distinction as creating an issue regarding the sufficiency of the Exhibit 5 opinion?
-3/3/2020

RE: In the highly unlikely event that this ever became an issue, I don't know how the Staff would interpret the use of the phrase "duly authorized" in the opinion in this particular context. Obviously, your intention is to simply address the corporate law issue of whether the shares have been duly authorized, but there may be some potential ambiguity in using that term in the context of an S-8 covering shares that need a plan amendment in order to be issued.
-John Jenkins, Editor, CompensationStandards.com 3/3/2020

Q: Have any of your clients reached out with questions about how to set performance-based compensation targets for 2020 given the uncertainty around coronavirus? Our client, a large cap pub co., will have a couple of targets it will be setting in the near future, revenue and adjusted EPS targets for the bonus and a free cash flow target for performance share units. Thank you.

RE: For what it's worth, one of the issues that I've seen companies grapple with is the possibility that whatever targets they set now, they may find themselves wanting to preserve the flexibility to adjust them in the future due to the uncertainties created by the outbreak. Adjusting targets is obviously something that many investors and proxy advisors are extremely skeptical about, but for many companies, there's legitimate concern that pegging targets now may turn out to be the equivalent of trying to catch a falling knife.

One of the things companies may want to consider is flagging the potential implications of the coronavirus on 2020 targets in their CD&A discussions of post-2019 compensation decisions, and providing some disclosure about the possibility of further adjustments, if that's something the comp committee wants to be able to consider.
-John Jenkins, Editor, CompensationStandards.com 2/28/2020

Q: A Nasdaq-listed company has a Compensation Committee that satisfies the composition requirements of Rule 5605(d)(2) of the Nasdaq listing standards. The Compensation Committee determines the compensation of the company’s CEO and certain other executive officers, but has delegated to the CEO the authority to determine the compensation of two executive officers. Does this delegation of authority by the Compensation Committee to the CEO violate the requirement in Rule 5605(d)(1) of the Nasdaq listing standards that the Committee’s charter must specify its “responsibility for determining, or recommending to the board for determination, the compensation of the CEO and all other Executive Officers of the company”? Nasdaq’s rule releases in 2002 and 2012 (NASD-2002-77 and NASDAQ-2012-109) suggest that the Compensation Committee must either determine the compensation of executive officers or recommend such compensation to the Board for its determination. Would such a delegation to the CEO be permitted if the Compensation Committee imposed certain limits on the CEO’s authority (e.g., a maximum percentage by which the CEO could increase base salaries or a maximum target bonus amount that the CEO could establish)?

RE: I don't think blanket delegation of authority to the CEO to set the compensation of other executive officers can be reconciled with the requirements of Rule 5605(d)(2). While the CEO can certainly make recommendations to the Committee regarding the appropriate compensation levels of the other executives, I think that the actual compensation "must be determined, or recommended to the board for determination" by the Comp Committee.

The CEO's role in setting comp for other executive officers should be laid out in the Comp Committee's charter. Here's an example from McKesson's charter that contemplates an active role for the CEO in the compensation process:

"For all executive officers other than the CEO, the Committee, in consultation with the CEO, will annually review and approve the corporate goals and objectives relevant to executive officers’ compensation. In light of these goals and objectives, the Committee, in consultation with the CEO, will determine (i) the salary paid to executive officers, (ii) the grant of cash-based bonuses and equity compensation provided to executive officers, (iii) the entering into or amendment or extension of any employment contract or similar arrangement with executive officers, (iv) executive officers’ severance or change in control arrangement, (v) material perquisites provided to executive officers and (vi) any other executive officer compensation matter that may arise from time to time as directed by the Board. In determining the long-term incentive component of executive officers’ compensation, the Committee will consider the same factors pertaining to such compensation that it considers for that element of the CEO’s compensation."
-John Jenkins, Editor, CompensationStandards.com 2/11/2020

Q: Would you please direct me to any CEO pay ratio disclosure that discusses a decision to change, or not to change, the median employee used the prior two years because of a change in the employee population caused by the sale of a subsidiary? I assume that the discussion would include an explanation of whether management considered the change in the employee population related to the sale to be significant. Any guidance that you could provide would be most appreciated. Many thanks.

RE: Check out Coca-Cola, which changed its median employee due to significant changes in its employee population due to dispositions and acquisitions:
-John Jenkins, Editor, CompensationStandards.com 2/4/2020

RE: Thanks very much for the extremely quick and helpful reply. Great service, as usual.
-2/4/2020

RE: You're welcome!
-John Jenkins, Editor, CompensationStandards.com 2/4/2020

Q: If a company gives gift cards (less than $100) to its employees (including its NEOs) for the holidays, is there any guidance or practice under which this can be excluded from the summary compensation table as de minimis (or for another similar reason)? Thanks.

RE: No, I don't think so. In fact, I've seen some ridiculously small gift cards reported in summary comp tables.

One for Moderna includes $200 gift cards given to its NEOs and even breaks them out separately in a footnote.

Nike doesn't break out the dollar value, but it also calls out "nominal" gift cards in the footnotes to its summary comp table.

Overstock not only put $250 gift cards in its summary comp table, it discussed them in its CD&A!
-John Jenkins, Editor, CompensationStandards.com 2/4/2020

Q: In our client's proxy the executive compensation section contains five NEO's, two of which did not receive an increase in base salary, while the other three did receive increases. Are we required to disclose that two executive officers did not receive an increase in base salary or can we remain silent with respect to such two executive officers in our component of base salary breakdown? If we are required to disclose are we required to give an explanation as to why the NEOs did not receive an increase?

RE: It's difficult to answer questions about CD&A disclosure in the abstract, because they are invariably highly fact-specific. However, Item 402(b) requires the CD&A to address all material elements of the registrant's compensation of its NEOs. Item 402(b)(2) lists information that may be material, and included in that list are "the factors considered in decisions to increase or decrease compensation materially." If the changes in base salary are material, I think this line item indicates that the reasons for decisions about those changes need to be addressed, and would expect that this discussion would likely need to address reasons why certain officers received adjustments when others did not.
-John Jenkins, Editor, CompensationStandards.com 1/15/2020

Q: I'm in the process of completing the annual review of our compensation committee charter and want to clean up language related to 162(m). Assuming that a company concludes that no covered employee may have compensation payable under a written binding contract in effect as of November 2, 2017, is there any reason under the TCJA's transition rule or the recent IRS guidance that a compensation committee member must qualify as an outside director? The charter would continue to require, of course, that committee members must qualify as a non-employee director under Rule 16b-3(b)(3)(i) and satisfy the applicable NYSE independence requirements. We've kept the references to 162(m) in the committee charter for the past two years out of an abundance of caution and would like to delete them unless there is a compelling reason to keep them. (As a practical matter, all current compensation committee members qualify as outside directors.) Thanks very much.

RE: I ran this one by Mike Melbinger, our resident 162(m) expert. He says there's no reason that a compensation committee member must qualify as an outside director.
-Liz Dunshee, Editor, CompensationStandards.com 1/13/2020

Q: If we granted option awards in 2019 with a two year vesting cliff, would we include those in the relevant columns in the summary comp table? Would we also include them in calculating the PEO Pay Ratio FY 2019 or would we solely include those in the proxy statement FY 2020?

RE: Yes, they would be disclosed in the year they were awarded, even if they haven't vested. The vesting arrangements would be taken into account in determining the grant date fair value under ASC 718. Under Item 402(u)(2)(i), the “total compensation” for the CEO used in the pay ratio calculation is generally required to be determined in the same manner used as the Summary Compensation Table (under Item 402(c)(2)(x)).
-John Jenkins, Editor, CompensationStandards.com 1/8/2020

Q: Assume these facts: A public company's EGC status expired sometime in the prior fiscal year. The company was an EGC for more than two years. The company continues to be a smaller reporting company/SRC. Early in the next fiscal year (during the 12 month period during which the company would be required to take their first say on pay vote pursuant to rule §240.14a-21(a) and Instruction 4, but well before they file their proxy statement for their annual stockholder meeting), said company enters into a merger agreement to be acquired by another public company, and in connection with that merger will be filing a merger proxy statement. Assuming only a special meeting to approve the merger is held, and no votes in respect of the election of directors etc. are being taken, no 402 disclosure should be called for under Schedule 14A since Item 8 is not triggered. However, if the company will be delisting after the merger which is expected to close prior to their 10-K due date and also prior to their annual meeting so that the Company's stockholders never will have the opportunity to take the say on pay vote that would have otherwise been required by Instruction 4/ rule §240.14a-21(a) as noted above, is there an argument that the merger proxy should have included 402 disclosure (and an accompanying say on pay vote) based on Note A to Schedule 14A which says that where any item calls for information with respect to any mater to be acted upon and such matter involves other matters with respect to which information is called for by other items of this schedule, the information called for by such other items shall also be given. Could that Note A instruction be read as to mean that Item 8 information should be provided along with an accompanying say on pay vote since the executive compensation disclosure "relates to" the golden parachute disclosure called for by Item 5 and the shareholders will never otherwise have an opportunity to vote on the company's executive compensation for the prior fiscal year (even though they will take a vote on the golden parachute disclosure)? Or is that way overthinking it and is the to-be-deregistered company off the hook for the prior years 402 disclosure and never has to take a say on pay vote?

RE: I haven't seen anything from the Staff interpreting the scope of Note A, but my sense is that it shouldn't be read that broadly - and the merger proxies that I've seen routinely include the advisory say-on-parachute vote without including Item 402 comp data. Even if Note A could be read to require Item 8 disclosure, your transaction does not contemplate the election of directors, which is required to trigger a say-on-pay vote under Rule 14a-21.
-John Jenkins, Editor, CompensationStandards.com 1/1/2020

RE: Thank you, John! Much appreciated.
-1/1/2020

Q: Does modifying the CIC definition in an LTIP (to match the CIC definition in other compensatory arrangements) trigger an 8-K filing under 5.02(e)?

RE: I think there's a good argument that if you're making a substantive change to a CIC provision, this is the kind of material amendment that would trigger an 8-K obligation under Item 5.02(e).
-John Jenkins, Editor, CompensationStandards.com

RE: Thanks John, really appreciate it.
-12/13/2019

Q: It being August, I'm naturally thinking about our 2020 CD&A, which is not the way things should be. Our 2019 CD&A was 23 pages long, or 50% longer than the first proxy statement I drafted 25 years ago. Most of us who draft CD&As can likely agree that they are too long and contain much more detail than most investors want or need. Very few investors, whether retail or institutional, actually read them or if they do read them, get beyond the first five pages. Investors become frustrated by trying to extract and understand the most important information, even with the help of graphics and plain English. For issuers with significant institutional ownership, the CD&A is largely irrelevant to ISS and Glass Lewis when determining their say on pay vote recommendations. Would you please point me to a CD&A that is concise (say 10-12 pages, assuming that there is one) yet effective in satisfying the SEC's rules and explaining an issuer's executive compensation program and outcomes to investors and the proxy advisory firms? If there is no such thing, why can't there be? Thanks very much.

RE: Levi-Strauss comes to mind, as does PPG. Mark Borges blogged about both companies' comp disclosures and you should check out some of the other companies that he highlighted in his blog.
-John Jenkins, Editor, CompensationStandards.com 8/6/2019

RE: Thanks very much for the quick reply. Will definitely do so. Much appreciated, as always. -8/6/2019

RE: Kudos to planning in advance and thinking this way. I think that a good, compliant CD&A should be able to be drafted in about 10 to 12 pages. Instead of long, narrative paragraphs and generic, multiple-year boilerplate, why can't nearly all of the material information be provided in basic bullet points or charts/tables?

The "what" could be provided very concisely in charts/tables (think salary, bonus and LTI information), and the "why" could be provided in brief bullet points. I also think the other standard narratives (i.e., philosophy, objectives, management/consultant involvement, elements of pay, pay mix, impact of SOP vote, etc., etc.) could be provided in bullet points, or a chart, or other graphic elements.

I think the real issue is that moving from what most companies produce now to a disclosure like that (really short, sweet) would be out of the ordinary and groundbreaking. And who is willing to be the first to try this really short, concise approach (i.e., risk of SEC comments, risk of plaintiff litigation, etc.)?
-9/12/2019

RE: Thanks very much for response. I think that it would be helpful if the SEC mimicked a high school English teacher, as in, "Please write an essay no longer than 2,500 words explaining to shareholders how your executive compensation program works, why your named executive officers received the compensation they did for the performance year, and how that compensation reflects your pay for performance philosophy." Let's be honest- virtually no one reads a CD&A, even if they claim to do so (cf. Finnegan's Wake). Certainly an institutional investor voting 4,000 positions on say on pay is not, your Uncle Joe is not, and the proxy advisory firms, if they read a CD&A at all, only extract certain information necessary to complement their quantitative screens. Because of the involvement of lawyers, compensation consultants, HR personnel, corporate governance experts, and endless "best practices" suggestions, the typical CD&A has become a bloated document that brings to mind the description of a camel as a horse designed by a committee. Not that I mind having a job.
-9/12/2019

RE: Maybe some people are taking your advice. Equilar just published a study showing that the average CD&A word count dropped for the first time in 5 years. Looks like companies may be relying more on graphs of alternative pay calculations to tell their stories:

- 75.8.% of Equilar 100 companies used a proxy summary in the annual proxy in 2018

- The word count of Equilar 100 companies’ CD&A portion saw a decline for the first time in five years, dropping to an average of 9,359 words in 2018

- The number of companies that included a pay mix graph fell six percentage points from 2017 to 2018, down to 78.8% of companies

- After hovering around 77.0-79.0%, the number of companies that included a compensation program checklist decreased by 3.3 percentage points from 2017 to 2018, down to 74.5%

- In 2018, 46.5% of Equilar 100 companies included a graph displaying an alternative pay calculation different from those displayed in the summary compensation table, such as realized or realizable pay
-Liz Dunshee, Editor, CompensationStandards.com 12/5/2019

RE: Thanks, Liz. Are you aware of any CD&A that includes a Q&A section? It seems that approach would be a good way to concisely convey the information of most interest to the proxy advisory firms and major shareholders. This is especially true when an issuer is trying to summarize the shareholder feedback received during engagement calls, how the comp committee responded to it, and where more detailed disclosure can be found.

Best wishes for a very happy 2020.
-12/30/2019

RE: I haven't seen that format specifically, but it does strike me as more user-friendly than a long narrative, and maybe some of our other members will chime in with their experiences.

DFin's annual "Guide to Effective Proxies" also gives many examples of CD&A TOC layouts and executive summaries that are often used to highlight this type of info. Although, here's what Dave Lynn had to say about CD&A summaries in the latest edition of our print newsletter, "The Corporate Executive"

Is a Summary of the Summary Really Necessary?

While proxy statement summaries have become a fixture of the modern-day proxy statement, one continuing area of debate is whether a company needs to include a summary of CD&A in the proxy statement as well. CD&A summaries could be the product of too much CD&A in general, and issuers that employ a CD&A summary should consider whether they could achieve the same objective by just making CD&A shorter and more effective.

A CD&A summary seems like such an anathema because the CD&A disclosure itself was intended to be a summary discussion. When adopting the CD&A requirement, it is unlikely that the SEC anticipated the ten thousand word behemoth that CD&A has become. We believe that a more focused discussion and analysis, when combined with appropriate graphs and charts that demonstrate key principles, would likely obviate the need for a separate CD&A summary that is intended to highlight only the most salient points.
-Liz Dunshee, Editor, CompensationStandards.com 12/30/2019

RE: Thanks again, Liz. I completely agree with David on the dubious benefits of a CD&A "summary", which often turns into a five-page drafting exercise that repeats information found in the CD&A. My point with the Q&A suggestion was that it could replace much denser and difficult to find information on one page right up front. The Baltimore Catechism always worked for me.
-12/30/2019

RE: Yes, I share your view that a Q&A done right would be much easier to navigate than a summary - just haven't seen that highlighted as a trend (yet). I will let you know if I come across any companies who are doing it...
-Liz Dunshee, Editor, CompensationStandards.com 12/30/2019

RE: CVS Health used a Q&A format as part of its 2017 CD&A summary. It got some love from the proxy design gurus, but the company seems to have gone back to a more traditional format in more recent proxies.
-John Jenkins, Editor, CompensationStandards.com 1/1/2020

RE: Thanks very much, John. I checked out the CVS CD&A and it's extremely helpful. Best wishes for a very happy new year to you, Liz, and your colleagues.
1/2/2020

Q: During the fiscal year, an executive officer (that is not an NEO) resigned as a director of the company. He did not receive any additional compensation for his services as a director. Interpretation 227.02 indicates the executive officer does not need to be included in the director compensation table if the footnote or narrative disclosure explain the (former) director is an executive officer. Is your understanding that the outstanding unexercised options and unvested stock awards (set forth in the Instruction to Item 402(k)(2)(iii)) of the executive officer may also be excluded from the disclosure?

RE: Yes, I believe that's correct. You should consider the possible need to disclose this executive's compensation in response to Item 404(a) unless the conditions set forth in Instruction 5 to Item 404(a) have been satisfied. See the discussion on pages 62-63 of our "Related Party Transactions Disclosure Handbook"
-John Jenkins, Editor, CompensationStandards.com, 10/16/2019

Q: It being August, I'm naturally thinking about our 2020 CD&A, which is not the way things should be. Our 2019 CD&A was 23 pages long, or 50% longer than the first proxy statement I drafted 25 years ago. Most of us who draft CD&As can likely agree that they are too long and contain much more detail than most investors want or need. Very few investors, whether retail or institutional, actually read them or if they do read them, get beyond the first five pages. Investors become frustrated by trying to extract and understand the most important information, even with the help of graphics and plain English. For issuers with significant institutional ownership, the CD&A is largely irrelevant to ISS and Glass Lewis when determining their say on pay vote recommendations. Would you please point me to a CD&A that is concise (say 10-12 pages, assuming that there is one) yet effective in satisfying the SEC's rules and explaining an issuer's executive compensation program and outcomes to investors and the proxy advisory firms? If there is no such thing, why can't there be? Thanks very much.

RE: Levi-Strauss comes to mind, as does PPG. Mark Borges blogged about both companies' comp disclosures and you should check out some of the other companies that he highlighted in his blog.
-John Jenkins, CompensationStandards.com 8/6/2019

Q: Is anyone aware of any companies disclosing in their proxy statement that the Compensation Committee determined there existed a conflict of interest with a compensation consultant? I'm just curious to see if there are any. Thanks.

RE: Negative. Mark Borges hasn't seen any yet that have disclosed an existing conflict and how it is being handled.
-Broc Romanek, Editor, CompensationStandards.com 1/8/2013

RE: To be clear, there have been companies that disclose that the Company uses the consultant's firm for other purposes and pays $___ in fees, but these disclosures than conclude - usually after adding reference to the consulting firm's internal policies re conflict - that this is acceptable. They don't say this a conflict but they don't say there isn't one (well, sometimes they say "we are satisfied that . . . "). They just disclose these facts.
- Broc Romanek, Editor, CompensationStandards.com 1/9/2013

RE: And don't forget this ongoing survey I am conducting on this topic: http://www.thecorporatecounsel.net/survey/viewresults.asp?SurveyNo=187
-Broc Romanek, Editor, CompensationStandards.com 1/9/2013

RE: I have seen many disclosures where affiliates of the compensation consultant provide other services to the company, but I don't recall whether I have seen disclosures where the compensation consultant itself is providing other non-executive compensation related services to the company. I assume that if such services were provided, best practice would be to make disclosure under Item 407(e)(3)(iv), and indicating that the Committee got comfortable that there wasn't a conflict of interest. Would best practice also lean towards not using the compensation consultant to provide compensation services unrelated to executive and non-executive director compensation matters? It's not clear to me that any such services could be provided without there being some conflict of interest.
- 6/25/2019

Q: One of the many issues raised in discussions of clawback or recoupment policies is whether public disclosure of the amounts recovered should be mandated. Shareholder proposals on this subject often ask that a company make such disclosures, provided, for example, that such disclosures do not violate any privacy laws. Let's say that a company claws back cash or equity incentive compensation from a named executive officer that has either been previously paid to the NEO or recoups equity compensation that has not yet vested or been paid out, and which has previously been disclosed in the CD&A, Summary Compensation Table, or the supplementary tables. What are the disclosure effects for future executive compensation disclosures in the company's proxy statement, whether in the CD&A or the comp tables? Many thanks.

RE: It’s still pretty rare for companies to recover previously paid awards under a clawback policy, but when Wells Fargo reduced award payouts, etc., the company discussed it in the CD&A. See pg. 54 of its 2017 proxy statement, pg. 71 of its 2018 proxy statement and pg. 98 of its 2019 proxy statement. Also see the discussion on pg. 107 of the “CD&A” chapter of Lynn, Borges & Romanek's "Executive Compensation Disclosure Treatise.” I don’t think this would have an impact on any of the tables other than potentially “Outstanding Equity Awards at Fiscal Year End.” See pg. 99-100 of the “Summary Compensation Table” chapter and pg. 56 and elsewhere in the “Equity Tables” chapter.

As far as awards that haven’t vested or been paid, if the awards would otherwise appear in the tables then Reg S-K CDI 117.04 indicates that you should still report them there – with a footnote that the award was forfeited (also see CDI 119.25 for non-equity awards). Again, though, it wouldn’t appear in the “Outstanding Equity” table since that’s reporting as of a specific date and presumably the award is no longer outstanding at that time. See pg. 56 of our “Equity Tables” chapter. And it also would be appropriate to discuss in the CD&A.

Here’s a link to the online version of our Disclosure Treatise with all the chapters noted above: https://www.compensationstandards.com/CD/
-Liz Dunshee, Editor, CompensationStandards.com 6/19/2019

RE: Thanks as always for the advice. I recall that in February of this year Goldman took the unusual step of filing an 8-K disclosing some of the possible clawback actions its comp committee was considering in light of the Malaysian investment fund scandal.
-6/20/2019

Q: Mike Melbinger's May 24, 2019, blog post on the seven venial sins according to ISS sent me scrambling for my dog-eared copy of the Baltimore Catechism. My copy is admittedly outdated and therefore does not address issues related to executive compensation, so I turned for guidance to the May 21, 2019, post by John Roe, Head of ISS Analytics, the data intelligence arm of ISS, on the Harvard Law School Forum on Corporate Governance and Financial Regulation. This is what I found on the first venial sin, "Placing excessive focus on TSR-based awards": "For years, companies and their third-party advisors have used total shareholder return (TSR) as a metric in compensation programs. There are a variety of ways to incorporate TSR in the compensation program: base relative TSR metrics (the most common by far), Market Stock Units (MSUs), simple stock price targets, and more. Companies and their advisors sometimes justify the use of TSR as a way to “satisfy investors and their proxy advisors” (although ISS never endorsed this metric and has quite emphatically stated being agnostic about metric selection going back to at least 2012). No matter the TSR award type, it may have some significant issues: • Point-to-point TSR measures over most executive compensation timeframes are more reflective of changing investor optimism than actual delivered performance. TSR is best measured over the long-term—often measured in decades, rather than the three-year performance period in an LTIP cycle. The varying placing of companies during business cycles over a three-year LTIP cycle and the point-to-point nature of most measurement techniques make a relative TSR measure more of a lottery ticket than a performance measure. • Relative TSR awards may be interpreted as a “punt” on the part of the compensation committee. Selecting the right metrics and establishing meaningful goals is hard—there’s no doubt about it. But many companies claim that they implement a TSR program because projecting three years of financial data is simply too difficult for them; relative TSR solves that need by not requiring any projection. But boards should have the means and ability to create such projections, especially if these measures will help establish meaningful goals. • TSR is a levered measure. In a bull market environment—which we’ve seen over the past 10 years—more financial leverage leads to higher returns; often companies with poorer fundamental performance but higher levels of leverage earn higher TSR than a similar company with lower leverage but stronger fundamental performance. However, when the market corrects, the situation will change significantly. • TSR awards do not give managers or investors clear line of sight. It’s hard for a CEO to get up in the morning and focus on “making more TSR.” A CEOs job description should not include “stock price cheerleader-in-chief” as the main focus. Many investors agree that CEOs should focus on resource allocation and productivity, and excessive emphasis on TSR may distract from those priorities. • TSR awards can reward the executive multiple times for the same shareholder wealth creation. Many alternative fund managers (hedge funds or private equity) have a concept of a “high watermark” in their fee structures; they are only paid once on value creation for their own investors. But we don’t often see similar safeguards in TSR-based executive compensation awards. That opens the potential for executives to be rewarded multiple times for creating the same shareholder wealth; the energy industry over the past four years has seen many such cases. Many investors do recognize that having a relative metric in a compensation program is useful to encourage executives to look both outward and inward to assess their performance. And, even if we acknowledge that “cheerleader-in-chief” for the company’s stock price may be an important part of the CEO’s job, it should perhaps be encouraged more modestly. Some companies have chosen to use relative TSR as a modifier, adjusting LTIP payments up or down a moderate amount—say plus or minus twenty percent—as a way to accomplish these two aims. That may be a great way to incorporate TSR into a compensation program without motivating excessive focus. Certainly, there are many other ways to solve this issue that are just as effective." Given the extensive use of TSR by ISS for purposes of assessing pay for performance alignment when making say on pay voting recommendations, I would be very interested in hearing your views on how ISS can reconcile its say on pay voting methodology with the views of its Head of Analytics. Thanks very much.

RE: Interpreting the internal machinations of ISS isn’t an easy task. I think they try pretty hard to keep the Analytics arm separate from the proxy advisor services, and John also noted in his memo that his opinions don’t reflect an official ISS position or a preview of upcoming voting policies. So take that for what it’s worth. But ISS has also been laying the groundwork for more reliance on “Economic Value Added” metrics, and at a high level, these points seem to be in line with its rationale for doing that. Here’s a blog I wrote a few months ago about their EVA analysis: https://www.compensationstandards.com/member/blogs/consultant/2019/03/eva-all-hype-no-nuance.html
-Liz Dunshee, Editor, CompensationStandards.com 6/19/2019

RE: Thanks, Liz. ISS's promotion of EVA as one of its quantitative pay-for-performance screens reminds me of one wag's definition of Philosophy: "The formulation of incomprehensible answers to unanswerable questions." In this case, the unanswerable question is: "How can a proxy advisory firm perform an analysis of CEO pay-for-performance alignment at several thousand public companies within the space of five months or so while ignoring the performance metrics and goals selected by the compensation committee, the individual performance of the CEO, or the company's business strategy or operational performance?" ISS's sudden enthusiasm for EVA may be attributable to its acquisition of a consulting firm that promotes best practices in EVA (whoever decides what those are). Given that very few compensation committees or consultants, if any, are designing incentive compensation plans using EVA as a metric for CEO pay decisions, it's hard to see how ISS's use of EVA will improve the quality of its pay for performance alignment methodology or say on pay voting recommendations. And what will come next after EVA?
-6/20/2019

Q: What is the industry standard or most common approach to counting shares on Form S-8?

RE: That's a longer & more complicated conversation than you might think. Check out the discussion beginning on page 50 of our "Form S-8 Handbook." https://www.thecorporatecounsel.net/GreatGovernance/member/handbook/S-8.pdf
-John Jenkins, Executive Press Inc 6/18/2019

RE: I was typing a response about how practice really varies - but John's cut to the chase. Also see the resources in our "Form S-8" Practice Area. https://www.compensationstandards.com/Member/Areas/FormS-8/
-Liz Dunshee, Editor, CompensationStandards.com 6/18/2019

Q: Instruction 10 to Item 402(u) provides that, where there is a CEO transition, the registrant may use the "PEO serving in that position on the date it selects to identify the median employee and annualize that PEO's compensation." Since the new CEO would, of course, not have been the CEO when the Year 1 median employee was selected, would this mean that, whenever the registrant has a CEO transition and wishes to annualize the new CEO's compensation for purposes of the pay ratio, it needs to identify a new median employee on a date when the new CEO was serving? Thanks.

RE: This was a fairly common point of discussion this past year - and just this week - at JCEB and the consensus was that the change in CEO is not intended to override the ability to use the prior year's median employee determination process. This is just one area where language in the rule is imprecise in a number of areas when applied in the year 2 context.
--Broc Romanek, Editor, CompensationStandards.com 5/10/2019

Q: Given the release of the SEC's final hedging disclosure rules, do you have any intelligence as to the status of the Dodd-Frank pending clawback and pay versus performance rule proposals? I'm unsure whether the answer will depend on the outcome of the 2020 presidential election. Thanks very much.

RE: I haven't heard anything from the SEC, but based on this summary of recent Congressional testimony from other interested parties, it doesn't sound like those rules are on the agenda anytime soon.
--John Jenkins, Editor, CompensationStandards.com 5/2/2019

Q: I’ve reading through some proxy statements and finding something I find pretty strange: CEOs and other top folks getting paid dividends on unvested restricted shares or, as I like to think it, shares they don’t own yet. I’m curious how many companies offer this perk. I seem to remember GE halting these payments a few years ago.

RE: Based on findings from the 2016 Domestic Stock Plan Design Survey, cosponsored by the NASPP and Deloitte Consulting:
75% of dividend-paying companies report that restricted stock awards are eligible for dividends, 78% for RSUs

For restricted stock:
- 51% pay dividends to employees in cash when paid out to the shareholders
- 29% pay dividends to employees in cash when underlying award is paid out
- 18% reinvest dividends into additional restricted stock and pay to employee when underlying award is paid out
- 2% payment decision up to the employee

For RSUs:
- 40% reinvest dividends into additional restricted stock and pay to employee when underlying award is paid out
- 34% pay dividends to employees in cash when underlying award is paid out
- 23% pay dividends to employees in cash when paid out to the shareholders
- 3% payment decision up to the employee/other
In summary, for restricted stock, 51% pay dividends when paid to shareholders, and 47% wait to pay dividends until the underlying award is paid out. For RSUs, 74% wait to pay dividends until underlying award is paid out, and 23% pay out at the same time as shareholders.
--Broc Romanek, Editor, CompensationStandards.com 4/9/2019

Q: Is there any guidance from the NYSE suggesting that the shareholder approval requirements of 303A.08 do not apply when an MLP whose common units are listed on the NYSE proposes to amend an equity incentive plan to substantially increase the number of units reserved for issuance thereunder (as opposed to when a corporation proposes to amend a plan to substantially increase the number of shares reserved for issuance thereunder)? I note the introduction to the corporate governance guidelines expressly excludes LPs from 303A.01, 303A.04 and 303A.05, but it then goes on to state that LPs remain subject to all other provisions of 303A, which I would read to include 303A.08. No guidance exists in the FAQs on equity comp plans under 303A.08 or the more general FAQs under 303A, or under the voting rights interpretations. I believe that unitholder approval would be required, but client is hearing from other sources that such approval is required only for corporations, not MLPs. I believe they may be confusing IRS requirements for shareholder approval of plans with qualified options with NYSE governance rules. But would appreciate either concurrence or any support for the contrary view.

RE: There's no formal NYSE guidance that has been published. But this is a position that NYSE has informally signed off on. The logic is that the MLP partnership agreement only allows unitholders to vote on certain matters, which typically do not include equity compensation plan matters. I have taken this approach for two MLPs now. You should email Cindy Melo (Manager of NYSE Regulation) with your fact pattern and request concurrence that your MLP does not need unitholder approval to amend/adopt an equity compensation plan. I received an email from Cindy, who was in agreement, both times I reached out.
--4/9/2019

Q: Does anyone know where I can find a 50-state blue sky survey of employee benefit plans? Thanks.

RE: Maintaining a 50-state blue sky survey is a full-time job for some lawyers at bigger law firms (as there are constant changes) - but I believe this issue only comes up if you don't register on an S-8. In the March-April 2005 issue of The Corporate Counsel, this issue was addressed: "What's the consequence if some plan transactions technically end up not being covered by S-8? The Staff prefers registration, because it wants the higher liability standards of Section 11 and 12(a)(2) to apply. If not enough shares are registered, some purchasers may have a rescission right, there may be Enforcement exposure, and Blue Sky law exemption/ qualification of non-listed issuers may be affected in certain states ( e.g., Pennsylvania). Moreover, counsel may be unable to issue a clean legal opinion (in a deal, etc.), and the auditor may get nervous. How could the alternative of registering on a gross counting basis be more burdensome than toiling with the auditor over whether there is an internal control problem lurking here, or worse?"
--Broc Romanek, Editor, CompensationStandards.com 9/22/2005

RE: How does the S-8 help with state/blue sky compliance? I was thinking plan awards that are derivative securities (RSUs, DSUs, phantom stock, etc.) may be "covered securities" if they are considered equal rank to a listed security, but I'm not aware of SEC guidance on this point. Do you know?
--4/3/2019

RE: Some states have language in their employee plan exemptions that limits its application to securities that are registered under the Securities Act or are issued under Rule 701. (Ohio is one - See OAC 1301:6-3-03E(5)). If you're an Exchange Act reporting company, you aren't eligible for Rule 701, so if you didn't have an effective S-8, you wouldn't be able to rely on this exemption if you needed it. Whether you need an exemption or not depends on whether the derivative securities you're issuing are "covered securities." Unfortunately, I don't think there's anything definitive from the SEC or the courts on that. But I can tell you that the Blue Sky folks probably think there is some uncertainty as to whether they are included in the "equal or senior in rank" language. That's because the 2002 Uniform Securities Act added language in the section exempting covered securities to exempt options, warrants & rights, which at least one commentator on that Act has said "are not themselves federal covered securities under NSMIA." (Robert N. Rapp, Blue Sky Regulation, Section 7.04, 2nd Ed.) While the existence of this language may potentially help you in the states where it's been enacted, it may also provide other states with an argument that your derivative securities aren't covered securities under NSMIA. 2004).
--John Jenkins, Editor, CompensationStandards.com 4/3/2019

Q: Many issuers register the interests in deferred compensation plans on Form S-8 for purposes of federal securities compliance. With respect to Blue Sky compliance, if the issuer’s common stock is registered on an exchange, may the issuer rely on NSMIA, Section 18(b)(1) of the Exchange Act, which includes in the definition of “covered security,” “ a security of the same issuer that is equal in seniority or that is a senior security” to a security traded on the exchange?

RE: I think this would depend upon whether the the company plans to issue under the plan solely to those who are existing security holders in which case this would likely work (but still may require a NY notice filing), or if the issuer intends to issue/sell "to the public" and those not yet a security holder (security holder includes option, warrant, note holders) and this reliance won't work because of the agent issue. I'm assuming these are "plans" as would be defined as employee benefit or similar compensatory plans?
--Broc Romanek, Editor, CompensationStandards.com 7/8/2010

Q: A public company client is presently negotiating a LOI on an acquisition, which would be material if completed. Members of the board are fully aware of the status of the proposed negotiations. As a matter of historical practice, the company has made an annual grant of restricted stock to directors as a part of their compensation. I've read some of the articles on this website dealing with spring-loaded options, but haven't seen much discussion on whether there is a similar issue with granting shares of restricted stock in advance of good news. Do the fiduciary duty and insider trading concerns raised in the spring-loaded option context apply with grants of restricted stock?

RE: Yes, as this Jones Day memo points out, spring-loading can be an issue with virtually any type of equity grant: "Although the media focus to date has been on stock option plans because of the accounting and tax implications, similar issues may arise for restricted stock, restricted stock units, or other equity-based forms of compensation where the timing or value of the grant is tied to the value of the award."
--John Jenkins, Editor, CompensationStandards.com 4/1/2019

Q: If life insurance premiums are paid pursuant to a non-discriminatory plan and therefore can be generally omitted from disclosure pursuant to 402(a)(6)(ii) are the premiums not required to be reported pursuant to 402(c)(2)(ix)(F)?

RE: You are correct - amounts for plans specifically referenced in Item 402(a)(6)(ii) need not be included in the compensation tables. Item 402(c)(2)(ix)(F) would pick up the amounts paid for life insurance available to the NEOs that is only available on a discriminatory basis. So, for example, premiums paid on your typical group life insurance plan available to all salaried employees would not need to show up in the All Other Compensation column of the SCT. One thing that I always like to point out about Item 402(a)(6)(ii) is that it is an exclusive list - so if you have a non-discriminatory benefit plan that is not a life, health, hospitalization or medical reimbursement plan, then you have to include the compensation arising under the plan in the All Other Comp Column (or another appropriate column) of the SCT, even if it is non-discriminatory.
--Dave Lynn, Editor, CompensationStandards.com 10/4/2007

RE: If a company pays life insurance premiums for an NEO that need to be reported because the life insurance offered does discriminate in favor of executives, do you need to count those premiums in the NEO's perks tally - for determining if the NEO's perks equal or exceed $10,000? 402(c)(2)(ix)(A) specifically requires reporting perks (when they equal or exceed $10k); whereas 402(c)(2)(ix)(F) specifically requires reporting life insurance premiums (regardless of the NEO's perks tally). I have always thought this differentiation between 402(c)(2)(ix)(A) and (F) means that life insurance premiums are not "perks" and do not get included in the 402(c)(2)(ix)(A) counting. But I see "life insurance premiums" frequently listed as possible perks.... --3/29/2019 RE: I don't think the Staff has specifically addressed this, but it seems to me that the answer likely is yes, even though premiums for discriminatory life insurance are called out specifically for disclosure in the "All Other Compensation" column. The definition of perk is slippery, and if you look at Chapter 7 of the Executive Compensation Disclosure Treatise, it notes that insurance premiums are among the items that could be characterized as perks. See the list of potential perks on pgs. 35-36 & the responses to various questions concerning insurance situations on pgs. 44-46. --John Jenkins, Editor, CompensationStandards.com 3/30/2019

Q: A client is looking for sample cryptocurrency/token plans or agreements. Does anyone have any such samples or is anyone aware of a good resource for same? Many thanks.

RE: I can ask around for sample agreements. In the meantime, if you haven't checked out the transcript from our recent webcast on cyrpto compensation, that could also be a good resource. It lists some drafting issues to think about and has a lot of other info. It's posted in our "Cryptocurrency Comp" Practice Area.
--Liz Dunshee, Editor, CompensationStandards.com 3/27/2019

Q: For a company that does have perks to report in the CD&A and Summary Compensation Table's All Other Compensation column, do the SEC rules require the company to actually use the word "perk" or "perquisite" in the proxy statement? S-K, item 402(c)(ix)(A) refers to "Perquisites and other personal benefits," suggesting that there may be personal benefits that are not perquisites...but I haven't been able to think of a reportable personal benefit that is not also a perquisite. The reason for the question...company is considering referring to "other personal benefits" (instead of the term "perk" or "perquisite") in the proxy disclosure. It seems to me that readers will understand that "other personal benefits" = "perks", so there should be no confusion caused by the absence of the specific word "perk" or "perquisite;" but I wonder if the SEC's use of the phrase "Perquisites and other personal benefits" in 402(c) means that the SEC views them as two different things, in which case, if you have perks to discuss/report, you should call them by their name (i.e., perks or perquisites). Appreciate your thoughts!

RE: Alan Dye notes: I don't think it's necessary to characterize a perk or other personal benefit as a perquisite. The rule and the interps included in the adopting release refer to "perquisites and other personal benefits," which indicates that a perk is a personal benefit, and there may be other "items" (as the guidance says) that are 'personal benefits' even if not characterized as a 'perk.' I'm not sure what might constitute a personal benefit but maybe not a perk, but I don't think it matters--both are personal benefits, and they can be characterized as such in the proxy statement. They'll have to be described with some specificity in the description of the "all other comp" number, so that no one is going to be misled by calling them a 'personal benefit' instead of a 'perquisite.'
--Broc Romanek, Editor, CompensationStandards.com 3/8/2019

Q: Our client declared a stock dividend on its outstanding shares mid year 2018. Does this mean for it's outstanding equity awards table in the 2019 proxy, it should adjust the pre-dividend number of shares / options to reflect the dividend? And if so, how many years back would we need to go? Is there an alternative way to handle this? Any guidance would be appreciated. Thanks.

RE: I'd adjust all the awards that have been affected by the stock dividend. Check out Alphabet's 2017 proxy statement and footnote 2 to the Outstanding Equity Awards table.
--John Jenkins, Editor, CompensationStandards.com 3/4/2019

RE: Reviewing Alphabet's proxy was very helpful, thank you very much.
-- 3/5/2019

Q: My recollection is that it is not permissible to revise the captions for the columns of the Summary Compensation Table (or any of the other supplemental tables) to better reflect the dollar values disclosed in that column. In our case, we don't need to disclose any above-market or preferential earnings on non-qualified deferred compensation in the column captioned "Change in Pension Value and Non-Qualified Deferred Compensation Earnings" and disclose in a footnote that the number represents the change in pension value for the previous year. Hence my question: Are we permitted to change the caption for that column to read only "Change in Pension Value"? Thanks very much.

RE: I don't think that's permitted. I think the advice in the old telephone interps still represents the Staff's position on changing the language of the tables: "The compensation disclosure rules do not, as a general rule, permit registrants to deviate from the highly formatted tabular presentations required except to omit any column or table otherwise not applicable. A limited exception has been made for the caption of column (b) in the Option/SAR Exercise table. The caption to that column may be modified to read: "Number of securities underlying options/SARs exercised." In all cases, the gross number of securities underlying the options/SARs exercised should be reported in this column."
--John Jenkins, Editor, CompensationStandards.com 2/8/2019

Q: Hi, Instruction to 402 states "Specify the applicable fiscal year in the title to each table required under this Item which calls for disclosure as of or for a completed fiscal year." What does this mean for the Summary Comp Table, which a table for 3 completed fiscal years? Are we required to include the year in the name of that table? Thank you!

RE: In practice, most companies don't do that, although I recently looked at Apple's and they do. Most of the tables I've seen reference the most recent year (that's what Microsoft does. Some just use "Summary Compensation Table" as a title. Most will reference the 3 fiscal years in the lead in paragraph to the tables in any event.
--John Jenkins, Editor, CompensationStandards.com 2/7/2019

Q: For the pay ratio disclosure, a client was anticipating using the same median employee as last year. The median employee quit in late November, i.e. one month before the end of the client's fiscal year. Is it permissible to annualize the employee's compensation for purposes of the pay ratio disclosure, or must the client determine a new median employee? Instruction 5 to Item 402(u) addresses annualizing, but does not seem directly on point. Neither did I find much clarity in the adopting release.

RE: Mark Borges notes: I believe that this situation is addressed by Instruction 2 to Item 402(u): “If it is no longer appropriate for the registrant to use the median employee identified in year one as the median employee in years two or three because of a change in the original median employee’s circumstances that the registrant reasonably believes would result in a significant change in its pay ratio disclosure, the registrant may use another employee whose compensation is substantially similar to the original median employee based on the compensation measure used to select the original median employee.” It seems to me that the departure of the original median employee from the company is the type of change in circumstances that is contemplated by this provision. Thus, I believe that this provision would apply. Consequently, I would recommend using another employee from the company’s original determination of the median employee with substantially similar compensation as the original median employee as the new median employee for purposes of year two. This would avoid the need to identify a new median employee, and also sidesteps the question of whether it is advisable to use an individual who is no longer with the company as the median employee in year two. Of course, I would add a brief statement explaining that the original median employee has been replaced by another individual whose actual total compensation for year two is being compared against the year two compensation of the Chief Executive Officer to come up with the year two pay ratio.
--Broc Romanek, Editor, CompensationStandards.com 1/3/2019

Q: I believe it has been clearly settled that the Item 201(d) Equity Compensation Plan table should either go in Part III, Item 12 of the 10-K or in the proxy statement incorporated by reference into the 10-K. However, thecorporatecounsel.net has a memo posted in its Disclosure Reform practice area from the SEC Institute that contends that the disclosure simplification final rules made changes to Item 201, Form 10-K Item 12 and Schedule 14A that clarify that the table should be located in Part II, Item 5 of the 10-K. See pages 9-11 of the SEC Institute's memo. When I look through the final rule from the SEC, I don't see those changes. Is anyone else aware of this possible change?

RE: The rule hasn't changed at this time. There's been some confusion over this, because the SEC originally proposed to delete Item 201(d) and the references to it in Part III of Form 10-K and Item 10(c) of Schedule 14A. And that deletion was reflected in the "Demonstration Version" that was initially published when the rule was finalized. But page 54 of the final rule actually says that the SEC is retaining the disclosure requirements and referring them to FASB for potential incorporation into GAAP. This "non-change" is reflected in the final "Demonstration Version" that was conformed to the Federal Register.
--Liz Dunshee, Editor, CompensationStandards.com 12/17/2018

Q: Our unvested non-employee Director equity grants forfeit for all board service termination events except for death or disability. If a Director resigns or is not elected at any point during the one-year vesting period, their equity is forfeit. Is this common practice? Any guidance or market data source on termination treatment for Director equity grants other than scouring public disclosures?

RE: Mike Melbinger notes: That is a fairly common practice for director awards with a one-year vesting schedule
--Broc Romanek, Editor, CompensationStandards.com 12/14/2018